Interesting to learn that the Wellcome Trust holds in excess of 2.2m shares in WONGA.COM, the PayDay Loan company that turned over £186.4m to December 2011, leading to a net profit of £45.8m. According to the charity’s website, it was founded by Sir Henry Wallace, “one of the most fascinating men of his time. A businessman, collector and philanthropist, he was born in the American Wild West but ended his days as a knight of the British Realm.” Is this the return of the Wellcome Trust to its founder’s past, becoming involved in the Wild West of Payday loans?
Henry Wellcome spent his last years preparing for his life’s work to be carried on after his death, for the benefit of mankind.
Upon creation of the trust in 1936: “The Trust has every appearance of being a big undertaking, bigger in the next generation than it can be in this. Upon the Trustees, especially those representing medicine and the ancillary sciences, a great responsibility will rest for the worthy investment of the sums which periodically become available…”
I can’t help but wonder how investment in such a politically contentious vehicle as a PayDay lending firm, making huge profits through loans to the desperate and needy, sits with the above mission statement.
As momentum grows for regulation, Ed Damelin, the founder and CEO of WONGA.COM, claims to be engaged and open to the conversation, in today’s Telegraph, believing it’s key. He feels that is the only way a level playing field can be achieved, both within the consumer lending sector and the wider financial services industry. “We want better regulation, we don’t want no regulation, as we want to keep the bad guys out,” he says.
“The bad guys make it difficult for everybody innovating [in] financial services. Wonga happens to be a poster child, as we’ve built a brand that is well recognised today and we’ve built scale.”
Currently regulated by the Office of Fair Trading (OFT), Wonga, along with other parts of the payday lending sector, will from next year be regulated by the Financial Conduct Authority (FCA), which Damelin welcomes.
Asked why – given the company’s new business strands, which in the past year have included a small-business loan scheme – competing with the likes of Capexpand.com, EZBOB.com, IWOCA.co.uk and Kabbage.com, (no connection) – and an e-commerce payment system – he doesn’t go the whole nine yards and apply for a banking licence, he recoils slightly.
“But then we’d have to be a bank,” he says. “We’d like to be regulated by them [the FCA] but we don’t want to be a bank.”
In what seems like the most deluded comment of the interveiw, Damelin argues that whereas regulation should help consumers, in banking it has helped the incumbents retain their power base.
“Wonga is at the heart of the alternative to overdraft late fees. More than two-thirds of our customers are using this as an alternative to an overdraft late fee, which are worth billions of pounds to UK banks every year,” he explains.
Hmmm, can anyone tell me the last time a high street bank imposed charges of 22% over 20 days for an overdraft of £207? I would wager that the “billions of pounds” the UK banks earn every year from overdraft fees involves much higher amounts for far longer periods, therefore not really a great comparison. But a good line of copy for a poster campaign, I guess.
The national press has really taken this subject to heart, as inches of column-space daily are dedicated to holding the industry in the spotlight, as this frightening article in today’s Independent records, citing a study by consumer group Which? that reports over 1m families take out payday loans in order to meet the rising cost of living EVERY MONTH. The following breakdown provides startling insights; just under 400,000/38% respondents use funds sourced from PayDay lenders for essentials, like food/fuel, but more worryingly still, 240,000/24% respondents use the costly credit to pay off existing credit! This last statistic is the scariest, because taking out a short-term loan to meet an existing debt feels like a slippery slope to destitution. As recently as May this year a young father of one took his life due to debt-concerns over £1,600, on the surface not a huge amount of money, but at the levels of interest being charged by PayDay lenders that balance would rise incredibly quickly, especially with APR of anything upto +5,000%.
Other alarming statistics from the report, 70% of payday loan users regret taking out credit in the past, 49% found they were unable to meet the high cost of payments and 28% said they sadly saw being in debt as a necessary part of life.
A spokesman for the debt charity StepChange told the Independent: “These findings are alarming and reflect what the charity is seeing. Credit should never be used to pay for essential living costs, and the fact that so many are using it this way points to a wider problem in the economy.
“This is particularly the case with high-cost credit and underlines why action is needed to tackle the problems in the payday loan industry.”
Richard Lloyd, executive director of Which?, also told the paper: “Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts.
“A clear message has been sent to lenders to clean up their act, but the regulator must back this up by enforcing proper affordability checks and punishing lenders who flout the rules. We also want more action from the Government to tackle this toxic market.”
The paper included the following case studies:
‘I’ve received dozens of emails and text messages urging me to take on another loan’
Mike Harris, 30, from Lewisham, south-east London, took out a loan when his overdraft limit was cut. While he was able to pay the money back, he said it was too easy to get into debt. “I was still in debt from my Master’s degree. I used a payday loan to tide me over.
“It look less than five minutes to fill in the forms, all they really wanted was a debit card to take the money back. If you can’t pay they add on another load of interest. Since then I’ve received dozens of emails and text messages urging me to take on another loan. They tell me I can have £100 in my bank account just by replying ‘yes’. Luckily, I was able to pay back only £100 a week after borrowing £80. As a councillor in Lewisham, I’ve seen a huge increase in payday loan shops on the high street. We’ve asked the Government for the power to refuse planning permission for loan shops in deprived areas, but they’ve done nothing.”
‘I don’t want to see other families suffer. We’re a strong couple, but it’s pushed us to the limit’
Faith and Dave Richardson, from Nottingham, had £700 taken out of their bank account just before Chritmas 2011. They had borrowed £130 from an online firm in April 2010. The lender wrote to them in April 2011 saying they had failed to make a repayment that month. At this point, the Richardsons had paid out almost £500, but the letters demanding spiralling payments continued to arrive. Mrs Richardson told her local paper: “I don’t want to see families suffer as we have. We’re a strong couple and we’re fighting this together but it’s pushed us to the limit.”