Bad debts start to rise along with the profits for Wonga.com: The payday lender that makes a point of its selectivity has nonetheless seen write-offs rise to 41% of revenues, writes Simon Bowers: VENTURE CAPITAL BACKERS HOPE FOR A PAYDAY
(Observer (UK) Via Acquire Media NewsEdge) A visit to Wonga.com, the website of the fast-growing online payday lender, is a seductive experience. "We know you just searched for payday loans - you might be glad you found us! We are different . . ." With Wonga, the borrower is saved the indignity of queuing at a high street store such as Money Shop or Cash Converters, or the intrusion of a doorstep lender calling at their home. "Wonga is super fast, convenient and flexible too - unlike most payday loans. You can apply online in minutes and usually get a decision promptly - no faxing, no meetings and no hanging on the phone listening to cheesy lift music . . . once approved we will send your money within 15 minutes."
In some respects, however, Wonga is all too similar to other lenders targeting high-interest loans at financially stretched borrowers. In 2011 it was forced to write off almost pounds 77m of bad loans - despite claims to be a responsible and "truly selective" lender.
Founder and chief executive Errol Damelin portrays the typical Wonga customer as a creditworthy borrower seeking speed and convenience - perhaps like Kweku Adoboli, the rogue trader who almost destroyed UBS, who, it has emerged, turned to Wonga.com to cover spread-betting losses - rather than someone at the limits of conventional sources of short-term credit such as bank overdrafts and credit cards.
On the Wonga website, Damelin tells prospective borrowers: "Part of responsible lending for us is being truly selective and making sure . . . we are using all the data we can possibly get to help us make the best decision as to whether you can afford the credit and whether it's really good for you at the moment.
"So we are very, very selective - much more selective than credit cards or banks in terms of who do we work with. It's really based on: 'Is this good for the customer or isn't it good for the customer ' We take that very, very seriously."
But Wonga's latest accounts show the firm wrote off pounds 76.8m during 2011 because thousands of loans proved to be "uncollectable". The bad debt bill is equivalent to 41% of Wonga's pounds 185m revenues for the year and is almost four times the figure for 2010. Filings at Companies House spell out that an associated accounting impairment was "mainly related to customers who are in unexpectedly difficult economic situations".
A spotlight on the legion of financially distressed Wonga borrowers comes at a sensitive time for the booming payday loans industry. The company recorded pretax profits up pounds 45.5m to pounds 62.4m for 2011, and last summer Damelin was reported to have held talks with bankers about a US flotation that could have valued Wonga at more than pounds 1bn.
But critics have grown increasingly uncomfortable at the combination of huge profits and few consumer safeguards. More than 40,000 people signed a petition in the autumn for a cap on the cost of payday loans and in November, former Treasury minister Lord Sassoon gave the strongest hint to date that government was growing sympathetic. Sassoon said: "We need to ensure that the FCA [planned new regulator the Financial Conduct Authority] grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and to ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution."
Wonga loans are made at a "representative" annual percentage rate of 4,214%, though the company argues this measure - which customers must be informed of by law - is unhelpful for short-term borrowers and exaggerates the cost of credit. Wonga has put its float plans on hold.
Last year a Guardian investigation sought to highlight the gap between Damelin's public portrayal of a typical Wonga customer - "young professionals who are web-savvy, fully banked, have access to mainstream credit and a regular income" - and the views of some borrowers and consumer credit campaigners. Wonga responded by suggesting cases highlighted by the Guardian had been regrettable, but rare, examples of unhappy customers: "It is clearly possible to find some people who are unhappy, in distress or we shouldn't have approved." And it added: "The reality is out of sync with the frequent media view that we prey on vulnerable or low-income families in hard times."
Asked about its latest bad debt write-off, Wonga told the Observer: "We are a provider of short-term unsecured finance, a financial sector which due to its nature has always been traditionally riskier than other forms of finance. Despite this, Wonga's industry-leading credit-checking technology keeps bad debts to within single-digit percentages of the total amount we lend. Our bad debt provisions have increased in the past two years in line with the growth of the business."
Damelin has claimed that Wonga, which will take over from Virgin Money as shirt sponsors of Newcastle United football club next season, had an "industry-leading" arrears rate and is more cautious about who it lends to than high street banks or credit card providers. In contrast to traditional doorstep lenders, Wonga says, it turns down almost two out of three first-time loan applicants and runs up to 8,000 high-speed, online credit checks before advancing loans in just 15 minutes.
Britain's biggest doorstep lender, the home credit division of FTSE 250 firm Provident Financial, booked impairments of pounds 224m for 2011. The sum is equivalent to 32% of Provident's pounds 697m doorstep lending revenues for the year. Provident makes no secret of the fact it caters largely to low-income customers, many of whom struggle to get the credit they need from banks.
Last year Damelin claimed that Wonga's arrears rate was about 7%. A source close to the company suggested the figure may in fact be slightly higher, but insisted it was still in single figures. Wonga provided 2.46m short-term loans during the year, with the average advance being pounds 255 and an average repayment period of 16 days.
With Wonga's plans to list on the stock market on ice, the company is reportedly looking to raise capital through a more discreet bond issue. It remains to be seen whether investors will prove to be as "selective" as Wonga claims to be.
Looking to cash in on the roaring success of Wonga is a small band of former Goldman Sachs executives who are among the leading investors in funds managed by Balderton Capital, one of Europe's largest venture capital groups.
Wonga is one of Balderton's most promising investments in recent times. Although plans for a US stock market flotation are currently on hold, Wonga has been in talks to acquire On Deck Capital, a small American lender, in a deal widely seen as a precursor to a future listing in New York. Some estimates have suggested Wonga could be valued at between pounds 1bn and pounds 1.4bn.
The venture capital group, which takes its name from Balderton Street in Mayfair where its offices are located, is thought to have attracted many millions to its funds through close links to several former Goldman Sachs bankers. At the heart of this connection are Goldman veterans Tim Bunting and Mark Evans, who are now among the four Balderton general partners who oversee the group's pounds 1.2bn investment empire.
Wonga is not the only controversial British dotcom that Balderton is grooming for a stock market float. The venture capital firm is also the largest backer of The Hut Group, one of Britain's fastest growing online retailers, which specialises in supplying low-value goods by post.
The Hut's use of an offshore warehouse in Guernsey to avoid VAT helped provoke a tax crackdown by George Osborne last year. The chancellor said such trade amounted to "exploitation that has left our high street music stores fighting a losing battle".
Nevertheless, The Hut, which operates websites including Zavvi.com, has restructured its distribution arrangements and is believed to be considering a float. It had attempted a stock market listing in 2010 but pulled back at the last minute. Analysts believe a listing could value it at more than pounds 300m.
Some reports have suggested that Sir Terry Leahy, the former Tesco boss, who has a stake in The Hut, could take over as chairman before a flotation, but it has other well-known shareholders, including Sir Stuart Rose, formerly of M&S.
Successful floats of The Hut and Wonga would be welcomed by Balderton investors who have watched three other businesses they have funded through early growth phases - Betfair, Circle Holdings and Payzone - greeted with disappointing stock market receptions in recent years. In each case, Balderton funds sold little if any of their investment in the flotation process. Chief executives at all three firms have since stepped down.
Performance figures for Balderton's four funds are rarely released, but the Observer has seen financial statements that give an indication of accounting writedowns booked in Balderton Capital II, the poorest performing fund. Despite receiving a huge boost from the $850m sale of social networking site Bebo to AOL five years ago, annual statements seen by the Observer show negative cumulative returns for Balderton II of 2.06% for 2009, 13.46% for 2010, and 18.12% for 2011.
The group stresses these figures are only accounting valuations and no indication of real investor returns delivered by the fund, which has been investing for eight years. Balderton founder Barry Maloney said: "We are confident of getting capital back plus [a premium] to our investors [in Balderton II]". He said it was not clear yet what the premium would be, but did acknowledge Balderton II was the group's most challenged fund, having been hit with heavy writedowns on investments in Codemasters, the software publisher, and DisplayLink, the graphics chip group. Simon Bowers
Errol Damelin, Wonga's chief executive, insists his company manages to achieve an industry-leading arrears rate. Photograph by Felix Clay
(c) 2013 Guardian Newspapers Limited.
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