Since 2014, the Financial Conduct Authority (FCA) in the United Kingdom has imposed a series of regulations against the payday loan industry. After widespread criticism from both consumers and non-governmental organizations (NGOs), the FCA decided to clamp down on the business.
After an array of investigations, the FCA put forward some new rules that the industry had to abide by. Some of these included capping daily interest rates at 0.8 percent and tightening the lending criteria when it comes to payday loans. The FCA also instituted a total cap on interest and fees at 100 percent of the principal sum and applied fixed defaulting fees at £15 ($22).
Industry leaders argued that these new restrictions would hurt payday loan stores. Critics didn’t really care about the warnings of how much it would hurt their business model. But, in the end, did it hurt?
Wonga, the biggest and most controversial payday loan lender in the UK, saw its losses more than double in 2015 amid a tougher regulatory environment and fewer consumers taking out payday loans.
The company reported a pre-tax loss of £80.2 million ($116 million) in 2015, up from 2014’s £38.31 million ($56 million). Following the applicable taxes, Wonga lost £76.5 million ($111 million), compared to £43.6 million ($63.23 million) from the previous year. The number of payday loans declined to 2.1 million, a 64 percent decrease from the year prior.
Operating costs have also ramped up. Wonga notes that the FCA’s stricter affordability checks, caps and the rigorous authorization process are all additional costs it has to bear.
Wonga does operate in other countries, including South Africa and Poland, but the UK payday loan niche is its primary business – UK customers accounted for 3.8 million of the four million loans it provided to borrowers.
Andy Haste, Wonga CEO, said that he thinks 2016 can be turnaround year for the fledgling financial alternative firm. He believes Wonga can return to a profitable state in 2016 and 2017.
“We have made real progress towards creating a sustainable business with an accepted place in financial services,” Haste said in a statement.
“These results are in line with the plans we put together when joining Wonga. They reflect a full year’s impact of the stricter lending criteria we implemented in late 2014, the price cap introduced by the UK regulator in early 2015, and the necessary investment we have made to transform the business. We expect 2016 to mark a turning point in our financial performance.”
There has been some speculation that Haste would change the name Wonga because of its tarnished reputation. Instead, Haste rebranded the company and repositioned itself as an alternative for middle-class consumers. The firm has also changed its marketing schemes by replacing the puppets seen in its television advertisements.
For now, Wonga stays at the name.
“We’ve always said from the start that we didn’t want to simply change the name, we wanted to show that change could be implemented rather than trying to do a brandwash and run away from the past,” said Haste.