Credit Cards & Loans
Payday loan industry crumbling; Wonga set to post loss
In the years following its full-market launch in 2008, Wonga enjoyed significant successes; by 2009, the company had already achieved profitability, with default rates below 10 per cent (less than average credit card default rates). Last September, however, the payday lender announced that profits for 2013 had fallen by 53 per cent (to 39.7m) due to “remediation relating to historic debt collection and system issues”. At the same time, the company also acknowledged that in future it would be “smaller and less profitable”, due to new regulations issued by the Financial Conduct Authority (FCA).
Since then, Wonga has lost £35m after being forced by the FCA to cancel debts amounting to over £220m, been fined £2.6m for sending fake legal letters to customers with outstanding debts (narrowly avoiding criminal charges), pulled all television advertising and downsized its operations by cutting 325 staff and closing numerous overseas offices.
The firm faces even bigger challenges ahead, due to recent moves by regulators. In January this year, the FCA published new rules that mean payday borrowers cannot be charged more than 0.8 per cent interest per day and will never have to pay back more than twice the amount they borrowed – and the fines that can be issued by payday lenders for late payments will be capped at £15. The FCA estimated that the vast majority of payday lenders in the UK will close their doors as a result. The next month, the Competition & Markets Authority recommended that all payday lenders be obligated to publish their rates on at least one price comparison site, and be transparent about penalties and ‘hidden’ fees.
There is also the prospect of even further restrictions on payday lenders being implemented if Labour form the next government; wide-ranging curtailments of the industry were outlined in the party’s manifesto launched last week.
A Wonga spokesman declined to comment.