Investors Stay Silent After Wonga Fiasco

Online payday loans company, Wonga, which pitched itself as a technology startup and attracted investment from multiple high profile tech investors, yesterday agreed to write off the loans of 330,000 customers, and waive the interest and fees for a further 45,000 — admitting its automated checks had failed to adequately assess affordability. The write off has cost Wonga some £220 million.

Wonga declined to detail the workings of its lending platform and how its algorithm was allowed to lend unsustainable loans to hundreds of thousands of customers, many of whom lacked disposable to pay back the loans or were already in debt to other pay-day loans firms.

A Wonga spokesman told TechCrunch it has a new interim decision-making process in place, as part of an agreement with new sector regulator, the Financial Conduct Authority (FCA). “There are a series of wholesale changes — at the heart of it is much greater scrutiny of loan to income ratios,” they said.

Wonga was founded in 2006, and has attracted a total of $145.4 million in three funding rounds, according to CrunchBase — with investors listed as Accel Partners, Balderton Capital, Greylock Partners, Dawn Capital, Meritech Capital Partners, Oak Investment Partners, and the Wellcome Trust charity (the latter sold its stake in August 2013, deciding it was “no longer consistent with our investment criteria”).

TechCrunch asked Wonga’s investors to comment on whether they thought Wonga — given the scale of the failures identified by the FCA, and the evident inadequacy of the technology platform — had acted responsibly.

We also asked them to comment on whether Wonga’s platform was being used to ‘growth hack’ the business by lending money unsustainably. Further, whether the sheer amount of revenues that Wonga built up during its meteoric growth led the business into malpractice.

No investor in Wonga responded with public statements. (Wonga’s motto is ‘straight talking money’).

Balderton and Accel declined to comment directly.

Greylock and Dawn Capital had not responded to requests for comment at the time of writing.

Index Ventures partner, Robin Klein, was chairman of the QuickBridge (Wonga) board until November 2013, when he stepped down from the role. Klein has also not responded to questions about his oversight of the business, during his tenure as Wonga chairman. He is still on the Wonga board.

UK law demands that all Boards of companies which lend money must know if the company has systems and staff in place to take an interest in the lives of their customers, which is legally known as a ‘duty of care’ in lending.

The full list of Wonga board members are:

  • Andy Haste (CEO)
  • Adrian Dillon (Non-exec Director)
  • Bernard Liautaud (Balderton)
  • Iftikar Ahmed (Oak Investment)
  • Laurel Bowden (Greylock)
  • Robin Klein (Index)
  • Sonali De Rycker (Accel)
  • Timothy Weller (CFO)

In the past, Wonga was evidently confident about the efficacy of its technology platform.

It built up its money-lending business touting the speed and accuracy of its automated decision-making platform — claiming this technology as a differentiator vs other online money lenders. In marketing material it said: “Wonga’s real-time and fully automated loan processing systems means more speed, convenience and flexibility than a typical online lender, or indeed any traditional form of credit.”

TechCrunch understands that Wonga used Experian data sets, however, it’s not known what data enrichment they did on top of that to lower credit score thresholds, and thus insulate the business from the risk of lending unsustainable loans.

Writing the chairman’s introduction in the 2012 Wonga annual report, Klein attributed Wonga’s profitability in that year to the “efficiency” of its technology platform, which he noted as processing “thousands of data points” per application:

Wonga’s profitability during 2012 was the result of the large scale of our operations and an unflinching commitment to providing a flexible and convenient service designed around customers.

We have managed to do this at scale thanks to the efficiency of our real-time ID verification and risk engine (processing up to thousands of data points for each application). Indeed, we’ve also delivered our service at a price which is often lower than, for example, unauthorised overdrafts.

But the FCA, which has only regulated the payday loans sector since April this year, found the platform performed inadequate affordability checks and led to unsustainable loans being granted to hundreds of thousands of people.

In plain English: the company had lent money to people that should never have been granted a loan because they had no hope of paying it back. People who lacked the disposable income to do so. Or who perhaps already had other loans.

Wonga was also censured by the FCA earlier this year for sending fake lawyers’ letters to customers in arrears. The company was forced to pay out more than £2.6 million in compensation to around 45,000 customers as a result.

The FCA is tightening the screw on the payday loans sector generally, including proposing price caps on loans earlier this summer — a proposal it’s currently consulting on. The days of short term loan companies charging vulnerable borrowers more than 5,000% interest, as Wonga has, look well and truly over.

In a statement put out yesterday, the FCA’s director of supervision, Clive Adamson, said: “We are determined to drive up standards in the consumer credit market and it is disappointing that some firms still have a way to go to meet our expectations. This should put the rest of the industry on notice – they need to lend affordably and responsibly.”

An internal operation is evidently underway at Wonga to address these issues, led by the appointment of a new chairman, Andy Haste, in July, as the FCA probed its business processes. At the time he said:”Wonga has understandably faced criticism and we know we need to repair our reputation and regain our right to be an accepted part of the financial service sector.”