Why Did Wonga UK Fail?

Wonga.com

Wonga launched in the UK in 2006 and was hailed by its co-founder, Errol Damelin, “as a platform for the future of financial services”. Since then, the short-term lender has undergone a dramatic rise and fall. In 2012, the company was touted for a flotation that valued the business at more than £770m. Just six years later, it was seeking emergency funding and was reported to be worth just over £20m.

Since then, Wonga has disappeared in the UK, Canada and Spain, leaving South Africa and Poland as the surviving brand remnants who now exist as entirely separate legal and business entities after successful sales to new owners. So what went wrong for a brand that was feted as one of a new breed of digital innovators and caused so much disruption in the finance industry?

A clampdown by the FCA

In 2011, the company issued in 2.5m loans, on revenues of £185m and a profit of £45.8m. However, in 2013, the regulatory environment the industry was operating in started to change, with the Office for Fair Trading ordering payday lenders to amend the conditions under which they operated and the Financial Conduct Authority (FCA) announcing that a cap was to be introduced on the total cost of a loan.

The tightening of regulations continued, and in 2014, the FCA ruled that the British Wonga.com’s debt collection practices were unfair. This prompted a deluge of compensation claims from borrowers, leading to payouts to 45,000 Wonga customers amounting to more than £2.6m. The firm also had to write off interest payments from 330,000 customers. This saw Wonga spiral into the red, with the profits of previous years being replaced by a £37m loss for 2014.

Attempts to rebuild the company

After a string of negative headlines and plunging profits, Wonga investors brought Andy Haste into the company to try and turn the situation around. He drafted in a new management team, led by chief executive Tara Kneafsey, that was charged with building a company that could be profitable within the framework of the new FCA rules. Wonga continued to post losses in 2015 (£80m) and 2016 (£66m), but the management team was hopeful of returning to profit in 2017.

Financial pressure builds

Wonga’s hope of a return to the black took a big hit in the second half of 2017, with figures from the Financial Ombudsman showing complaints against Wonga had leapt to 2,347, up from just 269 two years earlier.  That was a result of claims management companies getting in on the act, which made it much easier for customers to claim compensation for historical loans.

The ombudsman also decided to give borrowers more time to bring cases. That ramped up the pressure on Wonga further and created a surge of additional compensation claims that threatened the company’s survival.

The UK brand collapses into administration

At the end of August 2018, Wonga UK collapsed into administration due to the sheer weight of compensation claims. That left an estimated 200,000 customers still owing more than £400m in short-term loans and over 10,000 people with claims against Wonga for loans that had been mis-sold under the new FCA rules.

That brought the end of the once high-flying startup in Britain, however, Wonga is thriving in South Africa with their revamped personal loan product that affords much greater flexibility repayment terms compared to the old payday loans the UK brand became synonymous with.