Business, Innovation & SkillsWritten evidence submitted by Wonga.com

1. Background

1.1. Wonga.com, a UK registered company, does not specialise in or claim to offer advice on debt management issues specifically, but we are active in the wider consumer credit market and in particular in the short-term credit sector.

1.2. Wonga.com was invited by the Select Committee on Business Innovation & Skills (‘the Committee’) to give oral evidence on 29 November 2011 as part of the Committee’s present inquiry into debt management. We were however unable to attend on the date requested by the Committee and although willing to give oral evidence (as confirmed to the Committee in writing), no other date has been offered.

1.3. In view of this – and since our name has been mentioned in the context of the inquiry by a witnesses and in questions – we felt that it would be helpful to submit some observations of our own in writing, in addition to the written evidence already submitted by our trade body, the Finance and Leasing Association (FLA).

1.4. In the following section we set out some relevant information about Wonga and our business. In section 3 we address some specific areas which we feel may be of particular relevance to the Committee’s inquiry.

2. Wonga and its Business

2.1 Wonga.com, which is a UK registered company headquartered in London, is estimated to be the largest short-term lender in the UK by volume. Since 2008, when the company first became operational, Wonga has undertaken more than 2.5 million short-term loans. Wonga is not a traditional payday lender; the customer has total flexibility as to how much it can borrow and for what period. In addition, we do not have any shops or undertake any sales on a door-to-door basis. The service we provide to our customers is only available online or through a mobile telephone application.

Loan amounts, timescales and pricing

2.2 The maximum loan we advance is £400 for first-time customers and £1,000 for existing customers. The maximum period we lend for is normally 1 month.

2.3 In practice, the amounts borrowed by our customers tend to be smaller than the maximum allowed and for shorter periods. We aim to provide full flexibility to our customers, in that they can choose exactly how much they wish to borrow and for how long, within the above parameters.

2.4 The average loan for first time customers is £160 and the average period is 18 days. From our inception, we recognised the importance of ensuring that customers did not fall into a “debt-trap” in connection with our service. Unlike some other lenders, therefore, we offer all our borrowers the option of repaying early at no penalty – and around 30% do so.

2.5 Our pricing is also totally flexible in relation to the borrower choosing exactly how much they wish to borrow and for how long. We charge interest at the rate of just under 1% per day. The cost of a Wonga loan is accordingly around £1 per day per £100 borrowed, together with a fixed one-off transmission fee for each application of £5.50. The transmission fee covers the faster payment process, as we deliver the money into a customer’s bank account within 15 minutes of the loan being approved.

2.6 We aim for our pricing to be totally transparent: i.e. before a customer submits any loan application, we clearly show the daily interest rate and the fee as well as the total cost of the loan. New customers are limited to £400, while returning customers who have shown completely responsible use of the service over a significant period of time and built up a trust rating can borrow up to £1,000.

Customer base and pre-loan checks

2.7 We regularly survey our customers using Populus. Our customer research shows that our customers are typically those earning at least £20,000 per annum. Every Wonga customer has to have a bank account and a fully functioning debit card. All our consumers therefore have access to traditional banking services.

2.8 Our customer surveys show that ours is a mainstream product, with less than a quarter of respondents having previously used another online short term lender. When asked in our customer surveys to rank their choice of borrowing options, after Wonga, respondents indicated bank overdraft, bank loan and credit card in that order. Our most recent customer survey of around 20,000 respondents showed overall satisfaction scores of close to 90% - considerably higher than for any bank.

2.9 We have developed our own risk assessment and credit checking procedures, having recognised that the traditional bank scoring tests were not reliable indicators of a person’s ability to repay a loan on time. We use our own algorithm which is continually improving given the number of loans we have made.

2.10 As part of this, we subscribe not only to the major credit reference agencies (who charge us accordingly), but also purchase publicly available data from a wide variety of sources. Overall, we turn down some 60% or more of applications. We do not sell information of these declined applications to any other lenders. We do, however, return data to the credit reference agencies, with the consequence that paying off a Wonga loan on time and in full will improve a customer’s credit rating.

2.11 Overall, we aim to lend to those who can afford to repay their loans, not to those who can’t. The proof that we are not targeting those unable to pay lies not only in our particularly rigorous checks prior to any loan application being approved, but in the fact that our arrears rate is well below the industry average.

Repeat customers, extensions and arrears

2.12 As in 2.4 above, in recognition of the potential risk for customers of a short-term loan product becoming a long-term loan, we do not encourage or promote loan extensions or ‘roll- overs’. If the customer contacts us and requests an extension, they have to pay all fees and interest up to that date and they can choose for how long they wish to extend the loan, for any period up to a maximum of one month. We limit such extensions to three times. In practice, less than 9% of our customers extend once, with less than 1% extending three times.

2.13 Evidently, all the successful applicants to use our service were new applicants when we first established the service. Our average customer now borrows three times a year. However, the same extensive credit checking is undertaken for all returning customers as for new customers – and a large proportion of successful loan applicants remain first-time users. As mentioned, less than a quarter of respondents to our extensive customer surveys have previously used another online short term lender.

2.14 We have a large and dedicated customer support team and we collect our debts in house. We aim to lend to those who can afford to pay us, rather than those who can’t – and we have industry-leading low arrears rates as a result. However, if customers contact us with payment difficulties, we work with them to agree a sensible repayment plan. Even if a customer fails to contact us or respond to our attempts to contact them, we freeze interest after 60 days, so that interest cannot mount up indefinitely. We do not use the courts or bailiffs. We subscribe to the Consumer Credit Counselling Service (CCCS) and to and we are in regular dialogue with PayPlan, Citizens Advice, at both the national and local level, and Money Advice Trust.

Code of conduct and sector governance

2.15 Wonga is a member of the Finance and Leasing Association (FLA). The FLA has had a Code of Conduct in place for 19 years. Should any customer make a complaint about our service, we will endeavour to resolve it within 48 hours, but if the complainant is not satisfied they can contact the FLA and request a conciliation procedure. We support the written evidence which the FLA have given to the Select Committee.

2.16 Wonga also produces its own Code of Conduct. This makes it clear that applying for any form of credit is not a decision to be taken lightly. We believe short-term loans should be used for short-term purposes only, not for those with long-term financial problems. A copy of our Code of Conduct is attached in the Annex.1

2.17 The high cost credit sector covers a wide variety of lenders, from small local shops to pawnbrokers to home credit and large payday loan companies. The high charges levied by the mainstream banks for unauthorised overdrafts – even for small amounts – also brings them into this sector, as customer surveys indicate.

2.18 The sheer diversity of lenders renders it difficult to adopt a one size fits all approach to regulation. We are nonetheless very actively engaged in discussions with interested parties on how to make the sector work better for consumers.

3. Specific Areas of Relevance for the Committee

3.1 We believe that there are a number of common misunderstandings about the short-term credit sector generally and, on occasion, about the service we provide. Among the most common misunderstandings recounted are the following:

that customers are not provided with clear information of the cost of short-term loans

that customers are charged annual interest of several thousand percent on their loans

that loans are made irresponsibly by short-term lenders without proper prior checks

that short-term lenders target people of low incomes, who cannot afford such loans

that taking out a short-term loan can damage one’s credit rating and thereby prevent or restrict the ability of applicants to access other mainstream credit providers

that customers often have to pay back 10, 20 or 100 times what they have borrowed

that the sector is not formally regulated and without any supporting industry codes of conduct for the sector or, if there are such codes, that they are ineffective

3.2 Although we can only speak for ourselves rather than for the short-term credit sector as a whole, containing as it does a wide range of providers as indicated above, we believe that none of these allegations applies in our own case. We further believe that many of the concerns raised with regard to the sector as a whole have often been overstated. Where there have been practices that may give rise to any concerns, we believe these can and are being addressed under the existing legal and regulatory framework.

Information and transparency

3.3 As indicated above, we aim to provide clear and total transparency as to the cost of our short-term loans. Our website makes very clear the total cost of any loan, including both interest and charges – as can be seen by accessing our website at: www.wonga.com. This is in addition to the information on APR rates.

3.4 We believe most other short-term lenders also provide a reasonable degree of transparency. However, in so far as the Committee may have any concerns on this, we would welcome a recommendation that those operating in the short-term credit sector should provide clear, up-front information as to the total cost of loans – including both interest and charges – prior to any application being approved. This would be in addition to the information on APR as currently required by law. We believe that all participants should inform customers of the total cost of borrowing before they commit, in a clear and transparent way – and that this should apply equally to bank overdrafts and credit cards.

3.5 With regard to banks we note the headlines from a BBC Radio 4 Money Box programme at the weekend:

“Some High Street banks are charging “eye-watering” rates of interest when their customers go over their limit, research by Radio 4’s Money Box programme has revealed. A customer borrowing £100 for 28 days without the consent of Santander would repay £200, for example. That is the equivalent annualised percentage rate, or APR, of 819,100%.”

APR – a misleading measure

3.6 It is a requirement under both the terms of the Consumer Credit Act and the relevant EU consumer credit legislation that short-term lenders must state a ‘representative’ annual percentage interest rate, calculated on a compounded annualised basis, even where they do not in fact offer loans on an annualised basis. This requirement, dating back to the original Consumer Credit Act in 1974, results in considerable distortions, with an apparent annual interest rate of several thousand percent in our case and for other short-term lenders – and even higher APR figures for the cost of unauthorised overdrafts (a much more common form of short-term credit) from the mainstream banks.

3.7 This distortive effect has been commented on by parts of the media, including newspapers who are sometimes critical of the short-term lending sector, as the following example (from the Daily Mail newspaper last year) illustrates:

3.8 Many of those concerned with the sector, including some who are critical of it, have also recognised that a measure which assumes the customer is borrowing for 365 days and that interest is compounded on a daily basis is not an appropriate measure for short term credit. Even if it were possible to borrow for Wonga for one year – which it is not – the actual interest charged of just under 1% per day would in fact result in an annual interest charge of 360%, not over 4000 % (which is the impact of the requirement to show a representative APR). The existence of very high APR rates is good for publicity purposes for some of those critical of the industry, as opposed to more thoughtful critics who recognise the problem, but it bears little resemblance to reality. Indeed, there is some evidence that very high APR rates, confuse the public rather than assist them.

3.9 This issue is a concern for all short-term lenders. The Committee may wish to consider whether APR remains a valid measurement elsewhere.

Avoiding irresponsible lending

3.10 We have set out above in the earlier part of this submission the extensive checks that we make prior to approving any loan. We would argue that the making of such prior checks is both in the industry’s interest – to avoid making loans to those unlikely to be able to repay them – and in the consumer’s interest – to avoid piling additional short-term debts onto those who already face long-term financial difficulties.

3.11 We are aware that there is a range of approaches taken by companies in the sector to paying for and returning data to the main credit bureaux. This is an area where the Department for Business, Innovation & Skills (BIS) is looking for best practice, which we support – and where the key is that data is provided in a timely manner direct to the main recognised credit reference agencies. We would support any recommendation to encourage their wider use by those in the sector. In addition, as part of the ‘mydata’ initiative being undertaken by BIS, there is more that can be done to help all borrowers understand and have access to their credit rating – and we are in active discussions with BIS on contributing to this project.

3.12 We share the concern not only that customers might be encouraged to borrow more than they can afford – hence the importance of proper credit checking beforehand – but also that a short term product designed for occasional use can become a long term product by virtue of unrestricted rollovers. Although we have previously declined to provide any extensions at all, we recognise it can be in the consumer interest to be able to apply for a short extension at particular times. However, we believe a balance should be struck, whereby (a) short-term credit providers never pro-actively encourage such extensions by their customers, but only consider them in response to specific requests being made by customers themselves; and (b) a limit on the number of such extensions is in place. We would welcome the Committee’s views on this issue and its support for such a general policy.

3.13 Wonga does not target any particular group of customers and our customer research indicates that our customers, all of whom must have a bank account and a fully functioning debit card and the majority of whom also have internet access, have access to other mainstream credit products. We recognise that some short-term lenders, including the providers of home credit, may have other approaches. This is a difficult subject on which to regulate, since the alternative to short-term loans for those on low incomes – who (unlike our own customers) may have limited access to traditional banking services – may be illegal money lenders, whose methods of enforcement are of a different order to any of the legal and regulated short-term lenders. We nonetheless believe that all short-term lenders should make proper checks before authorising any loan, to whomever it is made.

3.14 In this context, it should be noted that the use of credit reference agencies, as practised by ourselves, allows users of short-term credit to enhance, rather than damage, their credit rating. Far from preventing or restricting the ability of short-term credit applicants to access other mainstream credit providers, the greater use of credit reference agencies would help enhance customers’ access to all forms of credit provision.

Limiting arrears – and help for those in difficulty

3.15 Borrowers must behave responsibly in terms of whom they lend to and how they deal with customers in financial difficulty. We believe all short-term lenders should subscribe to the services of the Consumer Credit Counselling Service (CCCS) and work with the other debt advisory charities in a pro-active way. We also believe that all lenders should respond constructively and proactively to those in hardship – in particular, by freezing interest on those who do fall into arrears, so that debts cannot mount up indefinitely, and agreeing sensible repayment plans with the assistance of the CCCS and other such bodies.

3.16 We currently limit interest on those who do fall into arrears to 60 days. We believe there is scope for all credit providers, including the banks, to adopt such a policy to prevent debts from multiplying excessively – and we would welcome the Committee’s views on whether this should occur more generally.

Regulation, enforcement and non-compliance

3.17 The short-term credit sector, in line with the rest of the consumer credit sector, is presently regulated by the Office of Fair Trading (OFT). All operators in the sector must be licensed by the OFT, which has the power to suspend or withdraw licences in the event of dishonest trading or other serious breaches of the law. As the Committee will be aware, there are proposals under consideration by the Government for this responsibility to be transferred in due course to the new Financial Conduct Authority (FCA).

3.18 A real concern for customers and the legitimate companies operating in the sector is the ease with which unauthorised lenders can set up offshore. Furthermore, the OFT arguably lacks resources to deal with those companies who are not complying, particularly licencees who knowingly display misleading APRs or make unsubstantiated claims about their products, even when the OFT is alerted to this. We would welcome the Committee’s views on whether the OFT (or the FCA in the event of its succeeding as the lead regulator in this sector) should have additional resources made available.

Effective Codes of Conduct vs. statutory controls

3.19 We support the work being undertaken by BIS to get the industry to produce Codes of Conduct with minimum standards. We believe that this is a practical way of ensuring that customers are protected. Both the FLA (our own trade association) and the Consumer Finance Association (CFA), which represents other short-term lenders, have their own Codes of Conduct. These can no doubt be improved further – and indeed the FLA has indicated that it is currently working on an updated Code of Conduct. We have indicated throughout this submission a number of areas where we believe industry conduct could be improved in the interests of consumers. We already seek to operate to best practice standards in terms of our operations and our own Code of Conduct, but we would welcome both the Committee’s and the Government’s support for improved overall standards.

3.20 There is already a significant body of legislation, guidance notes and European Directives concerning Consumer Credit and we do not believe that adding further regulation is practical given the wide range of companies engaged in the sector. We are aware of the discussion concerning price controls and we share the concern expressed by others. The evidence from customers is clear that we are competing with bank overdrafts and credit cards, yet we have not seen any suggestion that their pricing should be so controlled.

3.21 Previous Governments, including the last Government, along with the OFT have looked at the issue of statutory controls and found it likely to be counter-productive. The present Government has nonetheless recently commissioned further research into a proposal to cap not only the interest rate charged by short-term lenders but also other charges. We believe that the Government will wish to see the outcome of this new research before reaching any definitive decision on whether such a cap would be sensible.

8 December 2011