Wonga, the biggest payday lender in the UK, has plunged deeply into the red after being hit by a flurry of scandals that some believe may threaten its very existence.
The lender will this week report that revenues have collapsed by a third to a little over £210m, with losses spiralling to £35m. The losses come on top of a slide in profitability in the previous year as Wonga booked into its accounts the cost of reimbursing customers sent threatening letters from fictitious law firms.
The figures are also not expected to include the cost of the 325 job losses recently announced by the new executive chairman, Andy Haste.
While Wonga would not comment in advance of this week’s announcement, employees talked of how the business has massively scaled back its marketing since ditching the controversial pensioner puppet ads last summer. At the same time, Wonga has been forced, along with the rest of the industry, to lower its charges, and has heavily cut back the potential customers it accepts loans from, reducing potential revenues.
The losses, first disclosed by Sky News, will be announced this week, along with a detailed explanation by Mr Haste and his new chief executive of UK lending, Tara Kneafsey, of where the company’s future lies in the face of the renewed toughness of the regulators’ stance to the short-term loans industry.
Wonga is in the process of trying to renew its licence with the Financial Conduct Authority (FCA), which has, since January, capped loan and repayment charges permitted by the industry.
The FCA also brought in new rules forcing more transparency on the industry in the hope of making it more competitive and further bringing down interest rates. Payday lenders will have to list their deals on comparison websites in order for customers more easily to compare them. This is likely to drive down Wonga’s profitability even further.
The pain for Wonga may not end there. Labour has said that it would put an extra levy on lenders’ profits in order to subsidise local credit unions, which have lower interest rates. In its election manifesto, its leader, Ed Miliband, pledged to “deal with the scourge of household debt”.
Financial analysts have argued that, while most of the UK’s 400 payday lenders will be unable to survive under the FCA’s tough new regime, Wonga probably will, due to its size, technology and brand presence.
The FCA’s critics say it will force cash-strapped customers back to illegal loan sharks. Other experts say legitimate alternatives like credit unions will step into the breach, while many people who did get into the habit of using Wonga and others would simply become less willing to take on extra debts.
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