Wonga: credit where its due. do banks do this?
This one made me uneasy when I saw it. It’s a get out of jail card, sure. But just look at that interest rate.
But while at first glance these guys seem to be advertising interest charges that would make even a loan shark blush, just ask yourself. Why hasn’t a bank done this?
If you need money fast, Wonga promises you’ll have it in your bank account usually within an hour. You don’t need an account with them, just be a good risk. A very good risk...
2689% APR – are your eyes watering yet?
Wonga’s APR looks unreal, but that’s not what its about. its about approaching consumer lending from a fresh perspective and an open mind. About the smart use of risk and financial decision management technology that gives it the edge over everybody else. About beating the banks at their own game by playing it better.
But speed doesn’t equate to risk. Wonga’s tentacle-like connections to a wide range of credit reference sources and highly selective decision processes have seen it provide over 100,000 short term advances of up to 30 days. The amounts available are up to £200.
Wonga’s credit checks are particularly stringent. Wonga only offers the facility to around 1 in 10 applicants, so its risk profile is excellent.
A £200 advance for 17 days would cost you less than £40.00. In that context, that APR looks far more manageable.
Internet pawn?
Absolutely not. This isn’t some high-net worth online pawnbroker. You don’t put your Rolex in hock, or had over the keys to your Porsche. It’s just very clever use of technology to make rapid decisions.
You choose the amount, you choose how long you hold the money. Its all about customer choice, customer control.
Whether you’d choose to use it or not, it has to be accepted that Wonga fulfils a need a lot of us would have seen at some stage in our financial lives. And it seems to work.
In fact, the more you think about this simple bridging concept, the cleverer it is. It’s no-fuss, well executed and everyone wins by it being there. It’s just a great idea.
Wonga was created by South African Errol Damelin, a 39 year old ex-investment banker who learnt his trade in Israel. Backed by Balderton Capital, Greylock Partners, Accel Partners and Dawn Capital, Wonga secured $22.25 million worth of financing – so it got off the ground for less than the average cost of a high street bank’s TV advertising budget.
Once again, why didn’t our banks think of this?
Clearly, Damelin is a clever and talented guy. Sure, he’s had banking experience. And it doesn’t take a genius to see the potential in growing the relationship Wonga is rapidly forging with its clients.
This isn’t some esoteric Internet start-up without a meaningful revenue projection for years to come. This is an instant return, highly efficient engine to move money from A to B and back to A again. it’s true, disruptive innovation – but perhaps without competitors in the financial market, it could be argued Wonga has nothing to disrupt!
Wonga’s credit-worthy, high potential clients will remember what Wonga did for them and when it comes to offer a wider range of services, they’ll trust it to provide them. It will literally be building a reputation with every transaction.
And while Wonga’s been handing out cash and getting a great return from doing so, our banks are just sitting on their hands. Will our banks ever see the writing on the wall?
They’d better hurry, though. There’s not a lot of their wall left to write on…
on June 9th, 2009 at 10:08 am
Thanks for writing such an informed and balanced piece – refreshing when some people simply see ‘loans’ and a misleading APR figure before shouting blue murder. We’re passionate about responsible lending and use technology to make sure it’s not just talk.
on June 9th, 2009 at 10:59 am
Thanks, John,
I must admit, the APR was the first thing I saw, so I felt I should address that head-on and not skirt around it.
But its relevance to short term transactions like this is tiny and probably far less than the fees your bank would charge you if say, the funds you needed weren’t in an account to meet an unexpected expense!
A great idea. Well done for getting it off the ground in today’s climate, too.
on June 10th, 2009 at 5:30 pm
You have got to be kidding!!!! How can you believe that APR is right. They even have the nerve to show it on the homepage. Unbelievable. Too right the banks are not doing it. They would be firebombed!
on June 10th, 2009 at 5:42 pm
Hi, Billy.
APR refers to a rate taken across 12 months. This is designed as an ultra short term fix, but APR’s have to be shown.
The APR is rolled up into charges and interest and sure, if it was for 12 months it would be horrendous. But think about it.
The service is aimed at people with a sudden shortage of funds who are normally OK, not those with financial problems and bad risks. For those people, if they let their accounts slip into the red, they’d get hit with charges from their bank, maybe miss a direct debit payment and incur more fees.
What if it was a credit card bill missed? Again more charges.
This just allows an instant adjustment of your position. No fuss, no worries. Sure the bill is a little high but against the alternative its cheap. Think about this.
You normally buy fuel for your car at around £1.00 a litre. You make sure you always buy it at around that cost, OK?
Now, one day, you run out of fuel. You call a breakdown service. They bring you some out, but the cost works out about £2.00 a litre or even more. Do you refuse it?
No, of course not because its a short term thing. But you wouldn’t keep doing it, would you?
Like that emergency fuel, it fills an exceptional need. What’s wrong with that?
on June 11th, 2009 at 6:25 am
I think this is a kick a guy when he’s down attitude. You are taking money off someone because they have no option and thats what really annoys me about this. Why do they have to charge so much for so little – its because they know they can get away with it!!!!
on June 11th, 2009 at 6:30 am
@Billy – why are you so angry at Wonga?
Remember this is just a service being offered. No one is forcing anybody to use it. If people prefer to use it or go elsewhere, its entirely up to them. I wouldn’t use it but I can understand why it would be really useful for many reasons.
Maybe this will pave the way to more services like this and the market will drive down the price. That is what markets are all about, after all.