Faisal Islam from Benefits Britain TV gets offered a story by Wonga’s PR company, and it works!
This is not a moral analysis of Wonga. It is an attempt at a dispassionate economic one, albeit based on a briefing with Wonga execs this morning at the release of its annual report, and I have taken the statistics within it on trust.
Within, we learn that Wonga’s customers are typically carrying lots of student debt already:
So student debt = more concern about long term debt = willingness to pay more, in advance for short term credit
This is very likely to be a terrible deal. HSBC’s student credit card quotes an 18.9% APR and if you do clear the balance in 17 days like the Wonga guy says their typical customer does, you’ll pay jack.
Their defenders will tell you that the APRs in the thousands are misleading because no-one will roll them over for a year. This is truthy rather than true; if you’re going to pay it within two weeks, the APR will come way down however you borrow it. And if you aren’t, well, hello explosive debt dynamics.
The explanation is, of course, that their customers are typically at the chilly-limit in terms of credit availability from other sources:
Most of our customers are using Wonga as an alternative to an unauthorised overdraft fee and some credit cards
I.e. they’re already running at their authorised overdraft limit and possibly at the limits on any credit cards they have.
Why are they doing this? To pay rent.
If the Wonga bosses are right about their typical customers, then this is about squeezed living standards, which I have argued elsewhere is ultimately about the cost of housing.
Also, they’re too terrified or too ignorant or too desperate to understand interest rates.
Wonga is also thriving in a world lacking in widespread financial illiteracy. Interest rates are too complicated.
So, their customers are desperate to find rent money, up to their eyeballs in debt, bill-shocked by past unauthorised overdraft charges or credit card disasters, and baffled by the notion of interest rates. But:
They are clearly not all desperate Dickensian debtors suffering cyber debt slavery. Nor are they all stupid, as seems to be presumed by campaigners.
Financially illiterate, but not stupid, drowning in debt and struggling to find rent, but not desperate, in debt, or indeed Dickensian. And, as we’re going to see, they’re still putting in the hours. Quite the trick. And you’ve got to love the sneer at unnamed, unsourced “campaigners”. Unlike the false impression put across by these paranoid domestic extremists, everything is clearly OK and your latest instalment in C4’s endless Jeer the Poors season will follow after the break.
Why? Because they’ve got mobile phones!
Very few customers are on benefits. Our market is a banked market of people who have got smartphones
You can get an iPhone 4 on prepay these days; if you can get a postpaid contract you can get one free on a commit of £15.50/mo from EE. “They’ve got cellphones!” I remember that one from Iraq. More practically, if they’re flogging away at work and still this broke and not “on benefits”, are they getting their entitlement in Working Tax Credit and Local Housing Allowance?
Because algorithms!
Why should the equations, econometrics and extrapolations which were a root cause of the banking crisis work in Wonga’s case? Because the loans last on average for 17 days. Unlike the subprime crisis, where models of loan loss were based on house prices never going down, Wonga uses an extraordinary suite of variables to model likely default. So far, in tough economic times, it has not failed.
I remember that one from the bubble.
Because self-parodic journospeak!
It uses the mysterious formula that Wonga is trumping as its secret sauce
Oh, a MYSTERIOUS FORMULA? In a SECRET SAUCE? Sounds great, if it doesn’t make you TRUMP.
This post has been an example of successful PR. All the relevant information is actually in the story, just in the wrong order and buffered with warm words, hype, and bullshit. Therefore, it takes actual effort to remix it back out. It’s like disposing of enriched uranium; you mix the stuff with the bog standard kind, knowing it will take at least as much effort to centrifuge it out.
Meanwhile, Daniel Davies makes this point:
@yorksranter (in general, the Creasy/Jones connection miss that effective consumer finance regulation is all about marketing)
— Dan Davies (@dsquareddigest) September 3, 2013
Well, this is Boris Johnson’s doing, via his mate Dan Ritterband, in letting them take over every bus in London. The problem has a face and a name, and it’s kinda blond and chubby. Also, if the Great British public are that terrified of high street banks that they’re willing to pay 1000 times their interest rates on credit over two weeks, this is another key data point for our transition to a low-trust society.
Update: if you want a shorter, how about this? If what they say is true, and people are actually swapping credit cards or overdrafts for Wonga, nothing is more damning about them, because they’re using the advertising bully pulpit to get people who could borrow at 17% to borrow at 17,000%. There’s a word for that: a con. And if their competitors really are high street banks, then all the stuff about how the APR is misleading because they have to load the overhead on it is truthy; their competitors don’t need to charge 17,000% to wash their faces.
Ok, so we should regulate Wonga’s ability to advertise? I’m all for it, only I doubt dsquared is… Maybe we should actually be trying to solve problems instead of shrugging and saying “it’s tough, but tough for a reason.”?
If we banned this kind of lending, I suspect dsquared is right, it would put a lot of people in a hole. But then at least we might see who is in a hole and why and start working on helping them. Rather than abandoning them to services that keep them in the hole and subtly dig it deeper.
Ok, so we should regulate Wonga’s ability to advertise? I’m all for it, only I doubt dsquared is
I am. In general, payday lending has an important role as a niche service, and I do actually think that APR is a bad way to measure the cost of a short-dated small loan. But it should be something that you have to look for and search out when you need it. I don’t think that payday loan companies should be allowed to do big above-the-line campaigns at all.
Faisal got totally snowed there, in so many ways, but this is the real kicker:
So far, in tough economic times, it has not failed.
This was one of the points I was making in the big “banker bashing” post on CT all those years ago. Very few banks get into trouble because they make bad loans. They get into trouble because they make good loans which go bad. Wonga has precisely zip, zero experience of going through an economic *downturn*, which is when people who have good credit scores in the file suddenly turn into much worse risks. Also the very “algorithms” which are meant to top-slice the customer base and take only the “lazy buggers who would qualify for proper credit but can’t get their act together to apply for one and so will use a service that is almost literally spoon fed to them” segment are going to radically limit the target market size; Wonga’s owners will presumably be OK with it at this stage in its growth, but I doubt they’ve put this much investment in the hope of getting a niche product, and when they expand out of that niche, we’ll see how good their algorithms actually are.
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