London tabloids have characterized Errol Damelin, founder of online lender Wonga.com, as a high-tech loan shark “laughing all the way to the bank.” Incoming Archbishop of Canterbury Justin Welby says Wonga and firms like it violate the biblical ban on usury. Despite the jabs, Wonga has attracted financial backing from established Silicon Valley venture capital firms such as Accel Partners and Greylock Partners, and the site has plans to expand into the U.S. “We’re in the middle of one of the biggest shake-ups of any industry, which is what happens when digital collides with financial services,” says Damelin. Wonga’s lending is “controlled, and it’s short term. It’s all the things that traditional credit isn’t.”
Wonga makes loans of as much as $1,500 ($23,000 for businesses) at rates it says work out to just under 1 percent a day. On a $600, month-long personal loan, a borrower would pay about $190 in interest and fees—equal to a 31 percent monthly rate. Wonga’s typical customers are middle-income earners with cash-flow troubles. They apply for loans online and are approved or turned down in seconds, Damelin says. The company, which has 450 employees, claims to have made more than 7 million loans since 2007. Britain’s consumer protection law requires Wonga to publish its annual interest rate, which is more than 4,000 percent. The company says that rate is misleading, because it doesn’t loan money for more than a month and doesn’t compound interest.
South African-born Damelin, 43, founded Wonga (the word is Australian-British slang for cash) in 2007 after selling another firm he started, Supply Chain Connect. Wonga’s pale blue logo is splashed across double-decker buses, and the company sponsors TV game shows. In October, Wonga signed a four-year marketing deal with soccer club Newcastle United. The Newcastle deal was criticized by local politicians, consumer groups, and the Muslim Council of Britain, which warned that Muslim players could be violating sharia law by wearing Wonga-branded jerseys.
Wonga is growing fast—and so are its dud loans. Revenue more than tripled to about $280 million from 2010 to 2011, while write-offs for “uncollectable” debts nearly quadrupled, to about $116 million, according to the latest financial data filed with the U.K.’s Companies House, a government agency that tracks privately held British firms. Damelin says the increase in bad loans was to be expected with rapid growth and that the company can tighten the algorithm it uses to assess creditworthiness. That new software scrapes the Web for more than 8,000 data points, including Facebook (FB) and LinkedIn (LNKD) activity, and almost two-thirds of online loan applicants are rejected, Damelin says. The firm had profits of $69 million in 2011, up from $18.6 million the year before, according to Companies House.
Bad loans aside, Wonga is considered a top European candidate to go public and would be valued at more than $1 billion this year in the event of a share sale or acquisition, according to technology consultant Magister Advisors. “It’s fair to say the company is studying various options” to provide a return to its venture capital investors, says Wonga Chairman Robin Klein.
Damelin runs Wonga from a pair of converted Regency houses in London’s leafy Primrose Hill neighborhood with the standard accoutrements of Silicon Valley life—glass-walled meeting rooms, Nespresso machines, and calisthenics sessions. The fancy digs contrast with the traditional storefronts of the payday lenders that have long operated in down-and-out stretches of London.
Wonga also operates in Canada and South Africa. A U.S. debut is “on the agenda,” says Damelin, though lending regulations that differ from state to state pose a major obstacle. And Wonga’s expansion plans come as the U.S. regulatory climate has become less friendly for payday lenders. The Consumer Financial Protection Bureau is considering stricter regulation of short-term lenders, Director Richard Cordray said on Feb. 26. The services “are premised on the repeat use of the product” and could become “debt traps,” he said. In England, the Financial Conduct Authority, a new government consumer watchdog that will launch later this year, will have the power to cap interest rates on payday lenders.
Damelin says his company’s business is ethical. Wonga is filling a need for quick cash for customers who might otherwise overdraw their bank accounts, incurring steep fees, and small businesses largely ignored by overcautious traditional banks, he says. “There’s a cost, in pounds, to have access to cash early,” Damelin says. He takes the criticism of his business in stride, in part because it spreads awareness of the company. “The politicians and the people who have a go have been quite helpful,” he says.