Some Financial Ramblings About Wonga
I’ve never liked Wonga, ever since I saw a presentation of it at an Internet awards ceremony a few years ago.
There is an article in the Sunday Times today, which gives a few figures about the company. It apparently lent £375m last year and has made a debt provision of more than £66m. Or about 17.6 %.
That is a high figure and is totally out of line with good, well-run and profitable finance companies. I used to part-own one and our bad debt ratio was if I remember correctly about five percent. Which was well below the industry average at the time.
I also have my own figures from Zopa, where I invest money to lend to third parties. My bad debt to invested money ratio has never exceeded one percent. But I do have a fairly conservative lending policy.
I have done extensive financial modelling in the area of finance companies and like to think, I know why well-run ones make a lot of money.
The first rule is to only lend to those with good credit ratings. Here, Zopa and Wonga are two very different animals.
Zopa creams the top of the market, acts like a normal finance company to borrowers and cuts its investors in on the deal. In fact, I wonder how many Zopa borrowers think of Zopa as a cheap source of finance with excellent terms and conditions?
Wonga on the other hand is a bottom feeder, targeting those with problems and might well look like a loan shark to many possible customers.
Other lenders like say Nationwide, Lloyds and the other reputable banks and finance companies are closer to Zopa, but probably not as much as they’d like to be.
The second rule is making sure that borrowers keep their payments up. Wonga don’t seem to be doing this judging by the bad debt ratio of 17.6 %, whereas Zopa is probably much better than the average for a reputable bank or finance company,judging by my experience. My ex-partner in the finance company feels that the Zopa figures are better than any he’s seen.
Wonga’s model is different to any other finance company. Banks and in effect, Zopa, get their money back over a period of time, typically measured in months or years. Whereas Wonga, probably gets it back in days, so the money goes round and round in the course of a year. Or it should do!
You might consider that Wonga is a money rental company, rather than a lender. Even if it is one of last resort.
At present the Wonga model seems to be working, with a profit of about £26 on each transaction, of which the average size is £150. The Sunday Times doesn’t give the average length of each loan. Estimating what a typical reputable company might make on each deal, it looks like Wonga are really making quite a bit more money!
But there are two sides to every financial equation; money in and money out.
We ran our finance company on a very lean basis and if you are reputable and you get the business you need to grow the business as you want, then you don’t really need to spend too much money on things like advertising or promotion, as your customers do that for you. Even the banks don’t spend much on promoting their loan services! But they are uniquely placed to sell their loans with a big branch network.
Wonga are really spending it, judging by the adverts and the sponsorship you see. Recently, it has been announced that they are pursuing a sponsorship deal at Newcastle United. Remember that the world of personal finance is littered with companies that thought they had a better model, but in fact didn’t. I’m old enough to have seen quite a few!
Wonga’s financial model seems to rely on putting your name in front of as many mugs as you can to carry out its bottom feeding.
If you compare Wonga with any reputable finance company, it would be unlikely that the latter would fall into trouble over its borrowers, as it would probably treat them fairly and respectfully. Using Zopa as an example, it only lends to those with good credit ratings, makes no charges to those, who don’t get loans and generally charges a lower interest rate.
Wonga too, has already aroused the ire of some politicians like Stella Creasy over its policies and high interest rates. Politicians it should be said, need easy targets, like bankers with huge bonuses and payday lenders. Wonga in particular is a very easy target.
My financial modelling experience though does lead me to an important conclusion.
Wonga’s model will only generate profits, whilst there is a large pool of willing borrowers. At present there are obviously enough, but as more and more suffer because of defaulting to Wonga, will the general public get the message that has been preached by the papers, like the Sun here and learn to use alternative sources of credit, like credit unions. Or in fact will they, just manage their finances better?
I gave the example of the Sun, as it is more likely to be the paper of choice of a possible Wonga borrower. On the other hand, there are some nice pieces about Wonga in the Guardian, the Telegraph, the Mail and the Mirror It is also interesting to read some of the comments on a report of the Newcastle United sponsorship deal in the Newcastle Journal.
There is another big difference between the model Zopa and other reputable banks and finance companies use and that of Wonga. The former rely heavily on personal recommendations from satisfied customers to get business. Wonga would probably like to too, but with their high admitted default rate, the number of recommendations would be lower, especially if you’re being chased by them for the money.
So this all makes me think that at some time, Wonga will be unable to sustain the current growth. Especially, if legislation to limit their interest rates of over two thousand percent was passed by parliament.
I wonder whether they have already found the limit to growth, given the Newcastle United deal and the fact that the annoying bus adverts in London have reappeared in large numbers. After all what is a shirt sponsorship deal, but getting your company’s name in thousands of places on the street. If you are selling a quality product like say Emirates, Samsung, Standard Chartered or Waitrose, it doesn’t probably matter having thousands of football fans promoting your brand, but if you’re a payday lender, it might just be counter-productive It would be very informative to read a learned paper on the effectiveness of shirt sponsorship.
Now Lloyds And The Co-op Drop Us In It
Captain Mainwaring would not have been amused, as yesterday Lloyds and the Co-op seem to have had system errors, or as I prefer to call them programming bugs, in their computers. It’s here on the BBC.
It may have been unrelated but one of my credit cards wouldn’t work on-line yesterday and they asked me to phone them. They said they were just rebooting the computers, and it should be OK in a couple of hours. Do we reboot computers, as we generally give them a good kicking first?
How Zopa Beats The Stock Market
This article was trawled out of the Internet by Google. It’s well worth a detailed read.
The Downside of PFI
I found this little story tucked away on the Internet. In 1998, London Underground entered into a PFI contract with a consortium called Powerlink to provide power to the system. Although, they have no issues with the consortium, London Underground have decided to exercise a break clause, that should save them £220m over the thirty year life of the contract.
Sounds like good and sensible business to me, unless you’re a member of the consortium.
Supposedly, New Buses for London cost about £330,000 each. If you divide this into £220m, you get approximately 667 buses.
Didn’t Transport for London just buy 600 New Buses for London?
It makes you think!
Bank Transfer Problems
Last week, I wanted to transfer sixty thousand from the sale of my house in Suffolk, from my bank account to a respected stockbrokers, who were going to invest the money for me in a safe investment until I need it to perhaps do my new house up.
I thought it would be best to transfer ten grand to see that the system worked. It didn’t, so it was returned! Apparently, my bank tried to send it through Faster Payments and the bank at the other end couldn’t accept that sum immediately and returned it. Speaking to my stockbroker, he said this happened a lot. Is this down to money laundering regulations, which question all large transfers?
It turned out the maximum sum, that I could transfer must be less than ten thousand.
So I transferred £9921.00, by following my rules, as it was the twenty-first when I did it. It went through without trouble.
Then I transferred £9921.01, £9921.02, £9921.03, £9921.04, £9921.05 and £473.85, to complete the sixty thousand.
What a farce!
What got me, when I tried to transfer the £60,000 in the first place, was that my on-line banking site, stopped me, but didn’t tell me how I was to do it. I suppose, that I had to phone up or go into a branch. But then I bank on-line!
I suppose they want me to keep the money in my Current Account or so-called Saving Account, which pays a similar interest to a mattress!
No wonder everybody gets annoyed with bankers! But in this case, I assume that it’s the money laundering regulations, which are very easy to circumvent if you’re a drug dealer, but just make it difficult for the rest of us!
London Uses The Train Model For 600 New Buses for London
London has just ordered 600 New Buses for London from Wrightbus, according to this article on the BBC website.
Boris’s political opponents say he is wrong, but they would anyway, wouldn’t they?
On the other hand, what Transport for London (TfL) are using is exactly the same purchase model, as that used for trains in this country.
The trains are ordered by the Department of Transport, owned by leasing companies or ROSCOs and then hired by the train companies like Virgin. In many cases, the maintenance is arranged by the manufacturer or ROSCO and they guarantee to provide so many trains each day.
When applied to London’s buses, this must give similar advantages.
- Although, TfL are buying 600 buses, I suspect that this package includes maintenance and guarantees a specific number of operational buses. In fact, on the 38 route, there are nine in service, but usually one is kept as a spare, in case of failure.
- Are TfL selling the leases on to a third party? How many of those, who are against the deal, have never bought something on hire purchase or a lease?
- The buses can be used, where and when they are needed. Most routes need about 20-30 buses, so batches of the New Buses can be moved around, according to need. For instance, the passenger pattern may be very different according to the seasons, so buses might run on one route in summer and another in the winter.
- These buses will change as time goes on and owning them outright, gives TfL the opportunity to update the older ones to the new specification.
- I think too, that the single ownership, should mean that the buses will have a longer service lifetime, just like the old Routemasters and the Inter City 125 trains.
- It will also give TfL time to do a full analysis of bus design, operation patterns and costs.
So all things being well, I think this could be a good decision, that saves money in the long term.
Bank Transfer Traceability
One thing that annoys me about on-line banking, is that when you pay a bill like a credit card, you often can’t trace it at both ends, as often the reference doesn’t appear for some days. So now, I usually pay them making sure the last two digits are the day of the month. That way it becomes obvious, if the transfer has been made and what it was.
It really all comes down to the fact that banks do not provide full information on their statements. And when they’ve not got it, they don’t even give you a clue!
I would be ashamed if I’d designed such a poor system.
Did The Government Dither Over Northern Rock?
Sir Nicholas Macpherson was the senior civil servant in the Treasury, when Northern Rock ran into difficulties. He has just appeared before the Treasury Select Committee and there is a report here. This is the first paragraph.
The Treasury’s most senior civil servant has told MPs the government should have been quicker to nationalise Northern Rock following its collapse.
It doesn’t appear to me, that the government appeared to act quickly at all.
Perhaps, Gordon Brown was just being too prudent!
On the other hand, I’ve done financial modelling with loan companies and know that if you decide to run them down collecting all the payments aggressively, you can often retrieve a bad situation.
So perhaps, they were hoping Northern Rock would all come good! It didn’t!
Remember though, the bank did employ a lot of people in Labour’s heartland. So liquidation would have been a bad option for NuLabor.
Zopa Simplifies The Markets
Zopa has today announced that instead of having five markets; A*, A, B, C and Youth, this will soon be simplified to just three, with C and Y being discarded.
Effectively this will bring it in line with what I do, as I don’t invest in the Youth market and although I’ve recently added the C market to my offer, I haven’t lent anything there yet. All market rates of late have been very stable, so my control engineering theory says hat everything should be in balance.
I think they are right to do this.
- They would now be appearing to be making a much better offer to younger borrowers with a good credit rating.
- The simplified structure makes it easier to decide your lending strategy.
- It also makes it less important to get it right on the optimum.
We shall see if they are right and business and returns improve.
Is It Worth Investing In Zopa’s C Market?
Zopa’s C market pays better than the ones that I invest in now. At present, I get 6.3% in A*, 6.7% in A and 7.6 in B. Switching on C has given me 8.9% in that market.
I’m going to switch it on for a month or so, and see if my bad debt gets worse. I didn’t always have the B market switched on and so far, I haven’t had a write-off in that market. I enabled it on the 17th December 2010.
The aim is to see if the extra interest received is worth the extra defaults.
Suppose I had £1,000 invested in the C market, which could be paying upwards of 1.3% better than B. This would give me an extra thirteen pounds a year.
After about 12 hours, I’ve got one contract pending in the C market.
The Anonymous Widower 