Why Did Wonga UK Collapse?

The story of Wonga UK, from its meteoric rise in 2006 to its subsequent collapse in 2018, is one that was mired in controversy. The company, one of the very first examples of a fintech ‘disruptor’, entered the market with two revolutionary products that completely changed the way people borrowed money in the UK. It won a string of awards and became hugely popular among its customers before sweeping changes in the industry pulled the plug on the company’s stellar growth. 

So, how did Wonga UK go from being one of the financial world’s biggest success stories to a broken entity in just 12 years, leaving Wonga South Africa as the brand’s sole survivor (albeit now under a different owner).

Unprecedented convenience for borrowers

Wonga, the brainchild of South African tech entrepreneur Errol Damelin, launched in the UK in 2006. It aimed to simplify the lending process for UK consumers, which is something it did extremely well. Using two sliders on the firm’s website, consumers could choose how much money they wanted to borrow and how long they wanted to borrow it for. The money would then be in their account within just 15 minutes at any time of the day or night. 

The simplicity and convenience of Wonga’s automated lending process was unprecedented. The lender quickly became big business and won awards from companies such as The Guardian and the Sunday Times. It also inspired a range of copycat firms to enter the market and before long, the ‘payday loan’ market was booming. 

A storm was brewing

A tech company at its heart, Wonga relied on algorithms rather than face-to-face conversations to make its lending decisions. While that made the borrowing process very quick, it did not take into account the particular circumstances of the borrower and some of the flaws in the automated lending process began to be exposed.

People were offered loans who could not afford to repay them, children were able to borrow money using their parents’ details, and those who were unable to repay existing loans were offered new loans to help them do so. These practices soon drew the attention of everyone from MPs to the Archbishop of Canterbury and calls for curbs on the payday lending market increased.

The Financial Conduct Authority Steps in

In 2014, the FCA moved to regulate the payday lenders, including Wonga, and introduced a series of tough new rules they must abide by. That included interest rates that were capped at 0.8 percent per day, default caps of £15 and a ruling that no customer should ever repay more than twice the amount they originally borrowed.

This strict regulation severely dented the profit margins of the lenders, causing more than 100 payday loan firms to collapse within a year. Although Wonga’s profit margins were down, the company was able to withstand this initial salvo from the FCA. It was not until later in 2014, when the FCA ruled that Wonga’s debt collection tactics were unfair, that the original payday lender began to unravel. 

Compensation claims cause Wonga to collapse

As part of the FCA’s ruling, Wonga was forced to write off 330,000 of its customers’ debts at a cost of £220 million. There was also a torrent of new claims from customers when claims management firms began targeting Wonga. Each claim cost Wonga a reputed £550 each to process. 

That was the beginning of the end for the payday lender, and despite it raising an emergency £10million from its shareholders, it collapsed into administration at the end of August 2018. Although that brought the end of Wonga in the UK, the lender is still thriving in South Africa, where it offers a revamped personal loan product that provides much greater support for customers and more flexible payment terms.

Leave a Comment