Where should Wonga customers turn for credit after the firm’s collapse?
The high-cost lender has gone from boom to bust after falling into administration. But Big Issue Invest-backed responsible lender Five Lamps believes that fair credit should be easier to find
Even a payday loan couldn’t save Wonga as it collapsed into administration on August 30.
It had been on song just six years previously when it teetered on the brink of a £1bn New York Stock Exchange flotation. But its final note was the sound of tiny violins, according to social media jokes at its expense, after a final £10m cash influx from the board could not stop the firm collapsing.
In the wake of the news, actor Michael Sheen, who has stood against lenders who prey on the most vulnerable with his End High Cost Credit Alliance, called for ethical lenders to fill the gap left by Wonga. The Frost/Nixon star wrote in both Metro and The Observer of people “struggling with debt; the mental and physical toll it can take; the damage it can do to relationships; to families; the indiscriminate havoc it can wreak on people’s lives”.
For those unable to obtain credit with mainstream banks, firms like Wonga offered a short-term cash fix for 3.1 million UK adults in the past year. But it is the long-term pain that can soon see them drowning in debt with Wonga offering an annual interest rate of 5,853 per cent APR until it was capped by the Financial Conduct Authority in 2014 at 1,509 per cent. That was part of some of the regulations that cracked down on high-cost lenders that year, resulting in Wonga being crippled by a ruling to pay £2.6m in compensation to 45,000 customers and forced to write off debts of £220m for 330,000 customers.
It’s a different story with ethical lenders and it is an area that The Big Issue knows well, thanks to our social investment arm, Big Issue Invest. In the past, BII has backed not-for-profit lenders like Moneyline, Street UK and Fair For You, which received a £1m loan last year, to help stop people falling into the hands of unscrupulous lenders.
Its latest ethical investment is in Five Lamps, a responsible lender based in the North East of England – the same region where Wonga was founded.
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Big Issue Invest was among nine investors who made a £5m investment in Five Lamps to help it provide 100,000 affordable loans over six years to support the most vulnerable break out of the cycle of high-cost credit debt. It is the largest-ever single investment in a UK community lender. But Five Lamps’ Nicola Garrett stresses that the marketing power of firms like Wonga, which still has 220,000 customers owing more than £400m in its loan book, is the challenge that responsible lenders need to tackle to fill the void.
“There are lots of people cheering the demise of Wonga but fundamentally people will always have to borrow credit,” she says. “It’s an emotive subject because it often comes down to when someone needs money the most – if their car breaks down, or they have a problem with the washing machine or even just Christmas. That should not be an opportunity for people to be preyed upon.
“We largely agree with Michael Sheen. But one of the issues that we have is that we don’t have the marketing budget so we can’t compete with firms like Wonga. We wouldn’t be able to afford to buy Wonga’s loan book from the administrators. I was disappointed in the wake of some of the press coverage this week because it mentioned responsible lenders and I thought that would be a good chance for us to get some publicity. But they didn’t mention us by name. It’s about visibility – if people don’t know who to turn to when Wonga have gone, who are they going to turn to?
“In a way Wonga changed the face of the market and its customers’ expectations. They really hit the nail on the head when it came to what consumers want. All of a sudden you could get credit straight away with no waiting and we have had to respond to that.”
You’re unlikely to see Five Lamps’ name on a Premier League shirt any time soon but at the start of the decade the Wonga logo was a familiar sight on Newcastle United’s jersey as well as Blackpool and Hearts. Its TV ads featured instantly recognisable puppets signing re-worded versions of 1950s song Mr Sandman and other creations on heavy rotation throughout the day.
https://www.youtube.com/watch?v=ueA8ToV4S6Y
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And that saw Wonga regularly butt heads with the Advertising Standards Authority which banned the ads in 2013 and 2014, claiming they failed to demonstrate the firm’s sky-high interest rates and underplayed the magnitude of taking out a loan. Wonga was by no means the only offender in the industry with Peachy.co.uk and Loan Monarch also falling foul of the rules.
The move prompted Citizens Advice chief executive Gillian Guy to blast the use of “cartoon characters” for sending the “wrong message to borrowers”. “Years of debt are not cuddly or jovial, but instead are tough and distressing,” she warned.
Pick up a copy of this weeks @BigIssue and head over to page 8 for more analysis on the collapse of Wonga. We agree with Nicola @Five_Lamps on the challenge of marketing resources. The Alliance is working on plans for marketing to sit alongside capital, tech and better regulation pic.twitter.com/g2ibEZwTgx
The Broadcast Committee of Advertising Practice launched a consultation in late 2015 to determine whether scheduling regulations should be brought in to crack down on the ads. Despite finding that 31 per cent of parents backed a ban on ads before the 9pm watershed and 27 per cent did not support them after it, BCAP determined that no regulations needed to be brought in.
However, Garrett does support beefed-up financial education at school – a subject The Big Issue tackled last week – but insists that it is not a solution to those facing mounting debts now.
“One of the responses that we have got this week is about teaching more budgeting and financial skills at schools,” she says. “That’s fine and we are all for preventative measures like that. But it does not deal with the problem that we have now where people are going to turn to other, less responsible lenders. How are people going to know any different if there isn’t that marketing there? Our message is that we are here and a lot of people can come to us in times of crisis.
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“The difference between us and a less responsible lender is that we do not have any hidden charges or fees. We take more of an inclusive approach and engage and talk with customers to discuss repayment and our interest rates are cheaper. We do not lend to people who cannot pay because it makes no business sense and it does nothing to help them.”
What now for Wonga customers?
Wonga’s collapse does not mean that debts do not need to be repaid. The firm has stopped accepting new customers, but administrators Grant Thornton has taken on the firm’s loan book. It will now look to sell that to a new creditor with the remit of attracting the highest bidder.
However, the buyer will have to follow same rules as outlined by Wonga, meaning that borrowers should notice no difference if they keep their repayments on track. But anyone who does find themselves missing payments and struggling to repay could see their debts passed on to debt recovery firms and while they can’t increase interest rates or add charges that were not originally outlined in the credit agreement, they may bring bailiffs to your door.
This Christmas, 3.8 million people across the UK will be facing extreme poverty. Thousands of those struggling will turn to selling the Big Issue as a vital source of income - they need your support to earn and lift themselves out of poverty.
