What went wrong with Wonga? Tracing the demise of Britain’s largest payday lender

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Britain’s Wonga Group Ltd. was once hailed as a technological marvel, set to revolutionize online finance and payday lending across Britain and around the world. But the company also became a symbol for the worst aspects of payday loans, and on Thursday it collapsed into bankruptcy protection, brought down by a flurry of angry customers and aggressive regulators.

The privately held lender had been struggling for months, and a few days ago it cobbled together £10-million ($16.9-million) in emergency financing from its owners. It was a last-ditch effort to survive a torrent of claims from customers seeking redress for the company’s past lending practices. But the financing wasn’t enough, and on Thursday morning Wonga announced it was no longer accepting new loan applications; it later filed for protection from creditors. The board and subsidiaries “have assessed all options regarding the future of the group and have concluded that it is appropriate to place the businesses into administration,” Wonga said in a statement.

It’s a far cry from a decade ago when tech entrepreneur Errol Damelin launched Wonga in London with a few dozen employees and a vision of offering small loans quickly online. He hoped to appeal to tech-savvy millennials who needed quick cash but didn’t want the hassle of going to a bank or a payday lender. At Wonga, customers simply filled out a short online application and provided their bank details. Lending decisions were almost instant and the money was immediately transferred into the customer’s account. Mr. Damelin, who grew up in South Africa, had a history of successful web startups, but he had no experience in the financial sector. That didn’t matter at first, as Wonga’s popularity quickly spread and regulations on this type of lending were limited.

By 2012, Wonga was Britain’s largest payday lender, making nearly four million loans to more than one million customers. Its profit soared fourfold in three years to £84-million ($141.9-million), and the company branched out into business loans and mortgages. Wonga also expanded to Spain, Poland, South Africa and Canada, and announced plans to move into India. Its cheeky ads, featuring a pair of wise-cracking puppets, and sponsorships of big-league soccer teams put it in a different class from traditional banks and gave it an edgy appeal.

But there was also growing criticism of its lending practices, which included charging up to 5,800 per cent in annual interest on some loans and failing to properly check if its customers had the financial wherewithal to cover repayment. Critics included the Archbishop of Canterbury, Justin Welby, who called the company’s conduct immoral and vowed to push the lender “out of existence.” Members of Parliament weighed in as well, and Wonga eventually came under scrutiny by the government’s Financial Conduct Authority, which was created in 2013 to oversee the financial industry. Mr. Damelin insisted Wonga provided a critical service to a growing class of people and he said the interest charges were fair since loans were so short term. “They are picking on the wrong people,” he said at the time. “We are the good guys.”

The tide began to turn against the company in 2013. The FCA started cracking down on Wonga and other payday lenders by toughening regulations on how loans were approved and tightening rules regarding collections. In 2014, the regulator sanctioned Wonga for issuing fake legal letters to thousands of customers in arrears that threatened them with legal action. The FCA followed that up with an order forcing Wonga to write off £220-million ($371.6-million) worth of loans to 375,000 borrowers because the company had failed to take the proper steps to assess the customers’ ability to repay the money. The final blow came in late 2014 when the FCA unveiled a complete overhaul of the payday-lending industry. It capped interest charges at 0.8 per cent a day, roughly 1,500 per cent on an annual basis, and cut fees on overdue loans. The FCA also mandated that the maximum amount a lender could collect was 100 per cent of the amount borrowed – meaning that on a $100 loan, Wonga could collect a maximum of $200. The changes cost the industry around £250-million ($422.3-million) in lost fees and interest-rate charges.

The FCA regulations set an example for other jurisdictions, including Canada, where payday lending had also become a concern. Some Canadian cities have followed suit by banning payday lenders from setting up shop, while several provinces have tightened regulations and slashed the fees lenders can charge.

Wonga struggled to adjust to the new regime. Mr. Damelin left the company in 2014, and since then it has sold off several divisions, cut staff and closed some of its foreign operations, including the Canadian subsidiary. It lost £76.5-million ($129.2-million) in 2015 and £66.5-million ($112.3-million) in 2016, the most recently available figures. Revenue has fallen to £76.6-million ($129.4-million) from a high of £309-million ($521.8-million) in 2012, and the company currently has around 220,000 customers who hold £430-million ($726.1-million) worth of loans.

It’s not clear what will happen next to Wonga or its customers. The loans will likely be sold to other companies, along with Wonga’s remaining assets. Few people were sorry to see it go under on Thursday. “I cannot mourn the demise of Wonga. Its business model was exploitative and immoral,” said Labour MP Jonathan Reynolds, the party’s finance critic.