20 April 2014

Matt White

Matt White - Finextra

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.
A post relating to this item from Finextra:

Wonga ponders £1bn US float

06 June 2012  |  3401 views  |  1
British payday lender Wonga is looking across the pond at a possible £1 billion floatation on a US stock exchange, according to the Telegraph.

Wonga bad, Zopa good?

06 June 2012  |  5547 views  |  3

The name Wonga rarely appears in the media (Finextra included) these days without the accompanying adjective 'controversial'. Contrast the perception of the company with that of another innovative, technology-reliant online alternative to traditional lenders; Zopa. Far from 'controversial', the latter is often held up as a model for the future of responsible, big-societyesque lending. But are the reputations fair?

The terms:

A couple of months ago Zopa's founder Giles Andrews spoke at Finextra's Social Media Day. During his presentation, Andrews was at pains to stress how carefully borrowers are vetted, how modest the APR is (7.5%ish) and rare defaults are (0.8%).

In contrast, Wonga actually relies, to some extent, on customers not being able to pay off their loans and rolling over debts, which is when the compound interest does its work (4214% APR, although of course the loans are designed to be short term).

The tech:

In a Guardian article earlier this year, Darryl Bowman, Wonga's head of marketing is quoted as saying: "We see ourselves as an internet technology business first, and a finance business second."

This is surely a dangerous attitude: Does anyone really think that how the loan is arranged and delivered is more important than the money itself? For Wonga, convenience is everything but should it be? It certainly shouldn't be for the borrower, lured into debt they may well not need to take on or have the resources to pay off.

Wonga has been accused of 'legal loansharking' but loan sharks have always been a last resort. Wonga, so easy and quick to use, given the sheen of respectability by TV ads, might not be seen as the desperate measure it should be.

For Zopa, convenience is virtually irrelevant. Its borrowers have good credit scores and could get loans elsewhere while its lenders have easier ways to make a modest return on their spare cash. What the technology offers many of them is the feeling of being a part of something worthwhile. Andrews told the delegates at Social Media Day that he finds the activity on Zopa's discussion boards, and their tone, astonishing.

The online community even bleeds into the real world he told us: 500 members attend annual drinks events, people visit the office to say hi. Can you see 500 users turning up to an event hosted by Wonga? It would probably offer them loans to pay for their booze.

The PR:

The virtual community that Zopa has created has proved a remarkably effective recruiting tool, with evangelists spreading the social lending word. Andrews says that half of all borrowers arrive through word of mouth. For lenders its 98%. The firm has carried out very little traditional advertising.

Wonga, meanwhile spent £16 million on advertising in 2011, according to analysts AC Nielson MMS, quoted in the Guardian article. Yet despite all the TV and radio ads, the posters plastered on buses and football kit deals, Wonga has a terrible image; the poster boy for irresponsible lending and broke Britain. Meanwhile, shy Zopa secures fawning coverage in the broadsheets.

Easy then: Wonga bad, Zopa good?

I'm not sure that it's that simple. I really like the concept of Zopa and was impressed by Andrews at our event but can't help shake the feeling that the service is harmless but little more than a hobby, a novelty, for the comfortably off middle classes – a fun alternative to their bank. It's not really about the money.

In contrast, Wonga fills a very real gap in the market, providing something that its customers desperately need and often can't get anywhere else. For a mother who needs £50 to keep the heating on until payday, Wonga can be a vital resource. Of course it can be dangerous and of course there are horror stories but according to a Populus survey cited in a Wired article last year, 95% of 1500 customers polled said that they were "satisfied" or "very satisfied" with their experience – a result banks would kill for.

Wonga is an easy whipping boy but it addresses a need in society – if it didn't, it wouldn't be raising over £70 million in funding rounds and mulling a £1 billion float. Rather than kick Wonga, it would be far more productive, if difficult, to deal with the myriad problems that result in so many people needing to turn to payday lenders in the first place. 

Until then, there's space for both Zopa and Wonga.

TagsRetail banking

Comments: (5)

Matt White - Finextra - London | 06 June, 2012, 17:16

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. 

Tim Tyler - Misys - London | 06 June, 2012, 18:48

"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.

Brett King - Moven - New York | 06 June, 2012, 19:24

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

Matt White - Finextra - London | 07 June, 2012, 09:43

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.'

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 07 June, 2012, 17:05

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. 

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