By Mark Fairlie.

Yesterday, Sky News revealed that two investors, Balderton Capital and Accel Partners, had joined Wonga’s group of investors in a bid to fund compensation claims made against the payday lender.

Both investors have agreed to give a further £10M ($13M) in an attempt to save the company from what seems to be an inevitable insolvency. 

Past Scandals

In 2014, Wonga faced criticism over the high-interest rates it charged to its vulnerable customers, such as the elderly and those with a history of debt problems. When these startling claims emerged, Wonga agreed to write off the loans of 330,000 people at a sum of £220M in debts.

A further 45,000 customers who had received a payday loan with Wonga in 2014 had their interest and fees waived after the payday lender admitted that these customers shouldn’t have been accepted for a loan in the first place.

Wonga took this drastic action after admitting that their own affordability checks were insufficient – all the while claiming that their technology had “fancy affordability algorithms”. The payday lender only admitted to their misconduct after the Financial Conduct Authority (FCA) began acting as their regulator and the company had no other choice but to change their lending criteria.

It was at this time that Wonga’s customer base began to shrink significantly because they could no longer lend money to those who couldn’t afford it. It was also at this time that another scandal came to light as Wonga was censured by the FCA for sending customers fake lawyer’s letters in arrears.

The customers who had received the counterfeit lawyer’s letters received £2.6M in compensation altogether – making 2014 an expensive year for Wonga. And while Wonga uses the FCA’s rules for lending today, they are still receiving more and more compensations claims for their past misconduct.

Wonga’s current state

A Wonga Group spokesman told Sky News that there had been a “marked increase” in the number of compensation claims for legacy loans by claims management companies.

The payday lender’s spokesman said

“Wonga continues to make progress against the transformation plan set out for the business. In recent months, however, the short-term credit industry has seen a marked increase in claims related to legacy loans, driven principally by claims management company activity.

“In line with this changing market environment, Wonga has seen a significant increase in claims related to loans taken out before the current management team joined the business in 2014. As a result, the team has raised £10M of new capital from existing shareholders, who remain fully supportive of management’s plans for the business”.

Sky News revealed that before receiving a cash flow injection from investors, Wonga was on the verge of going bankrupt. This May, Wonga’s CEO Tara Kneafsey had warned the company’s institutional shareholders that the business risked becoming insolvent without a “capital injection”.

“Cash-strapped” Wonga receive £10M to fund misselling claims

Since changing their business model to follow the FCA’s lending standards, Wonga’s profit margins have disappeared completely. In fact, they have been losing money for several years now. In 2015 the payday lender reported a loss of over £80M, while in 2016 they lost a further £65M.

Wonga’s latest funding emergency saw the company valued at just £23M ($30M), according to Sky News. It was just in 2012 that the company was on a three-year growth path to an estimated £15BN valuation.

However, their higher level of profitability was driven by interest rates as high as 5,853%.

The company’s decline in valuation can be accredited to following the FCA’s cap of 0.8% per day for all high-cost short-term credit loans since 2015 and by its paying out of millions in compensation to the vulnerable customers who had struggled to repay their loans.

Wonga’s online FAQ reveals that their current APR is at 1,460% and claims that they have

“introduced lots of changes at Wonga to make sure we offer better, fairer loans to customers. We take a responsible approach and lend only to those we believe can reasonably afford to repay”.