The Anonymous Widower

The Archbishop In The Wonga

Before you open your mouth, it is always best to check your facts or in the case of Justin Welby, your church’s investments. If he had he’d have found that his target yesterday, was a company they’d indirectly invested in. It’s reported here on the BBC.

A few weeks ago, I wrote about Robert Peston’s views on Wonga. I said this.

Obviously, Wonga did a lot of analysis on their data and this has led them to their success, as they have the right model and technology. Peston says Wonga’s technology is world class.  If banks such as RBS, Northern Rock and Bradford and Bingley had had world-class technology, they might not have gone bust.

I would add to that now. Perhaps, if when you sign any credit agreement or loan, how many would be refused if versions of Wonga’s technology is used. The success of any loan or credit company depends heavily on the quality of its lenders.

But the downside is that there would be a hard-core of people unable to get any form of credit.  No reputable lender, and especially a credit union, would ever touch them.

July 26, 2013 Posted by | Finance, World | , , | 2 Comments

Archbishop In Cloud Cuckoo Land

This story about how Justin Welby aims to compete Wonga out of business, is on the BBC today. Here’s the jist.

The Archbishop of Canterbury has warned the online lender Wonga that the Church of England plans to force it out of business – by competing against it.

He may have laudible aims, but like the poor, loan sharks, where legal or not, will always be with us.

What the people who use Wonga need is money and if everybody supported credit unions, that wouldn’t give any money directly to those who need it.

Credit unions, like all responsible lenders, don’t lend money to those who would be unable or unwilling to pay it back.

July 25, 2013 Posted by | Finance, News | , , , , | 4 Comments

The Archbishop Preaches

According to the Sunday Times, the Archbishop of Canterbury, wants to drive payday lenders and loan sharks out of business. He has delivered a speech to the House of Lords on the subject and it’s reported here.

I don’t share his optimism, as there are some bad practices that are impossible to stamp out, save of executing everybody who does them!  But even would that discourage smokers? I doubt it!

He says we should encourage the growth of credit unions. It’s a laudable aim, but we have just so many financial illiterates for it to make any difference.



June 30, 2013 Posted by | Finance, World | , | 3 Comments

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.

October 7, 2012 Posted by | Finance, News | , , , , , | 4 Comments

Is There A Case For A mini-Peer-to-Peer Lender?

By all accounts, the lender of last resort, Wonga, is successful, despite the fact that it lends money at extortionate rates to those who shouldn’t really be borrowing money.  On the other hand, the major peer-to-peer lenders, like Zopa, Funding Circle and Ratesetter, go from strength-to-strength and continue to gain plaudits from financial commentators.

If the peer-to-peer lenders have a problem, it is the perceived entry level, where potential investors like the concept, but are put off by not wanting to put several thousand pounds at risk.

So could the parameters of the peer-to-peer model be modified to borrow smaller amounts and lend it to out in dribs and drabs as payday loans?

I’m not sure, but it would be a much more ethical way of satisfying the market and possibly educating the borrowers as well.

You’re probably venturing very close to a completely automated credit union.

August 2, 2012 Posted by | Finance | , , | Leave a comment

Credit Unions

THe BBC is plugging credit unions this morning. I am all for that, as I think they are a good alternative to banks for a lot of people with simple financial needs.

but type in “credit union Hackney” into Google and you get this message.

Hackney Credit Union has ceased trading and the branch has closed.

So not a good start!

Type in “find credit union hackney” and you get some assorted credit check and loan adverts.

You do get this page from Hackney Council, which tells you about credit unions. But it doesn’t give the branches in the borough.

So unless you know about credit unions and where one is located, you haven’t really got much help.

If we want to get more people to use credit unions, then they must get control of the Internet.  Especially typing “find credit union” should not get a loan shark.

Credit unions are much more successful in the US, but then they are much bigger with probably more branches. Look at the web site of the Credit Union of Southern California.  IT certainly doesn’t look to be a small organisation. Where is the Londonwide credit union?

Could it be that the banks have got their friends in Government to effectively ban them?

January 27, 2012 Posted by | Finance | , , , | Leave a comment

Responsible Lending

If I walk up the Kingsland Road in Dalston, the road is crawling with money shops, pay day loan companies.pawnbrokers and all of the other dodgy lenders that proliferate these days.

So when someone who works in finance, said there was a thing called The Lending Code, I thought I’d take a look.

It is the sort of worthy document produced by regulators and the like that is manna from heaven to all those dodgy lenders down the Kingsland Road and others who shark loans with large amounts of advertising, sponsorships of Premiership football teams and sometimes with door-to-door salesmen with big boots.

I always remember a story told by a respectable finance guy, who said that when the government restricted the length of time you could take out a loan for and if it was for something like a car, then you could only lend a percentage, it was a licence for finance companies to literally print money. If everybody sticks to the Lending Code, then the costs to borrowers will go up, banks will make higher profits and many will be effectively removed from the list of borrowers. A lot will remove themselves because they won’t be bothered to read the paperwork.

When I was in Greece, I thought I might stay a bit longer and in that case, I would have needed more cash, as Greece is very much a cash society.  So I used the Internet to login to my Nationwide account and increase the overdraft.  In the end, I came home and haven’t used the limit.  But would the Lending Code with all its provisions on overdrafts make such a simple transaction more difficult?

What is really needed is a plain English Lending Code. When I was at ICI, we used to write and distribute flyers about the jobs we did with our computer. They were successful in getting new business and this was because they were read.  And why were they read?  Because they were a single sheet of A4 paper.

So The Lending Code as implimented by a bank say, should be a series of web or A4 pages related to each area of lending.  If it can’t fit on one sheet, then The Lending Code is wrong.

Only in that way could we have a code that could be understood by the man or woman on the Dalston Omnibus!  These are the people we need to protect from the lenders.  Not those like me that sit in the middle of the lending market and only use it, when they have a well-thought out need.

I like Zopa and I’ve met a few of their borrowers, who seem very happy with the way Zopa does business. In a way, you can almost class Zopa as a group of people coming together to lend money to others.  Isn’t that supposed to be what building societies and credit unions were and are about?

In a way though, Zopa, although it is unregulated by the FSA, acts like a mainstream lender, in that it does proper identity and credit checks and gets tough with those that default on their payments. I think, that it might be unique in that it allows borrowers to chsnge their payment day or repay the loan early without penalties, when perhaps their cicumstances change.  Both these features, should be in The Lending Code.  I can’t even find the word early in The Lending Code.

So yet again the bureaucrats are creating work for themselves in trying to protect the unprotectable.

April 13, 2011 Posted by | Business, Finance | , , | Leave a comment

Is it Usury?

I was rather surprised that Provident Financial, who reported good results this week, charge some of its customers an interest rate of up to 545% on loans.  Martin Narey of Barnardos is not amused.  And neither am I!

But to criticise the company is wrong, as they are merely filling a gap in the financial services market, that should be catered for by micro-finance companies and credit unions.  As to the latter it has always puzzled me why they have such a low profile in this country, compared to the United States.  They seem to be ideal for the times and also for lending small amounts of money in more stretched communities.  Especially, as any profits stay in that community.

Could it be that the regulations are framed to protect the banks?  After all, no credit union has ever taken the Chancellor of the Exchequer to the British Grand Prix or other major sporting event.  And they probably don’t pay anything to the government, except perhaps VAT and Income Tax for employees.

At least though, the spam I used to get from doorstep lenders like Providential has stopped. (They didn’t send any incidentally! Or not to me at any rate!) This offered me loans at high rate and it came from spam companies in the United States.  However, a letter to my MP, who talked to the government, stopped the process in days. 

There’s another moral in that tale.  Don’t underestimate the power of your MP! If you have a problem write to them!

July 30, 2009 Posted by | Finance, News | , , | Leave a comment