Wonga bad, Zopa good?

Victoria Ward from Wonga has e-mailed this response:

Hi Matt, it's Wonga here. An interesting post and we always welcome new viewpoints. I don't think we've ever compared ourselves to Zopa, other than the fact we're both young companies doing new and innovative things in finance. I would just like to make a few quick points of our own, in response to some of the suggestions made if that's OK.

Firstly, our business model does not rely on customers not being able to pay off loans or on rolling debt. Just the opposite, because we make money when people pay back on time or early and that's why we decline around two-thirds of applicants with our data-based, automated approach. Less than 1-in-10 loans are ever extended (which customers can choose to do by as little as 24 hours, if their circumstances change) and we limit such requests to three maximum.

Our average loan is 16 days and we charge simple interest of just under 1% per day. So, for a typical loan of £160, that's around £1.60 per day - for cash we deposit in minutes, 24/7. The APR never becomes relevant to such loans and no-one pays hundreds, never mind thousands of per cent in interest. We even limit interest in arrears to 60 days maximum, should we not be able to agree a sensible repayment plan beforehand.

Secondly, to your point about the implausibility of customers "turning up to an event" hosted by Wonga – we have nearly 100,000 active Facebook fans, who are largely customers. That's more than virtually all the high street banks put together and we prefer to engage with customers on a daily basis.

We also survey our customers regularly, independently and on a very wide scale (more than 28,000 respondents to the last one), as you alluded to. Less than a quarter say they have used a comparable, short-term loan service in the past and yet all have fully-functioning bank accounts. More than 75% also say they had access to traditional credit products at the point of application. This is not a service for people without choices, but a new way for people to cover short-term needs and it's far more mainstream than most people realise.

Thanks for letting us make a few points. 

"The APR never becomes relevant..."

I'm not sure the regulator would agree with that comment, especially if it is used as part of a sales-pitch.

What Wonga and Zopa are both doing are serving needs of the consumer. Financial 'services' have become mired in rules around 'banking', risk and the right way to approach process, but that rarely translates to a better customer experience. In fact, it is more likely the case that over time this results in a poorer lending experience.

Traditional players and regulators alike might say that Wonga's lending decisions are predatory, however, customers who can't ordinarily get a short-term loan might say Wonga saved the day! Wonga is offering a service, and there is a substantial cost to that service if you don't respect the rules. While it is unconvential, it is still ultimately providing a service to a segment of customers that it really knows well and serves well. Banks, on the hand, aren't interested in this segment. 

So what's better? We take the hardline traditional approach as an industry and say these are risky customers that need to improve their financial health before we'll consider lending to them, or like Wonga we identify a gap and service it effectively?

I'd say the reality is that we need both, and Wonga's not bad - it's just different. The demand for their services no doubt validates the need for their model. Of course, their success would still not incentivize a traditional player to change their view of risk. Which is the whole point of disruption of traditional industries.

BK

Via e-mail, some thoughts from an anonymous Zopa lender:

'Speaking for myself as a Zopa lender of a few years now I'd say Yes, I am middle class but definitely not comfortably off. I enjoy the social aspect of Zopa and I appreciate the financial returns on my small investment. Giles is right when he says that many of us that are active on Zopa's discussion board feel we're part of something worthwhile.'

The moment politicians get in on the act, tough times begin, as brick-and-mortar Wonga equivalents - called MFIs or Microfinance Institutions in India - learned the hard way. The problem with frictionless onboarding of the variety provided by Wonga is that people tend to forget that Wonga literally saved their bacon a few days after they've gotten onboarded. I doubt if politicians ever give any credit for it. When it comes time to repay their loans, they only think about the heavy interest costs and start appealing to consumer protection agencies and / or politicians to bail them out. Keeps happening in so many areas of financial services, hope Wonga is preparing itself to face it in its own space by budgeting for a high enough loan loss rate.