Wonga: Errol Damelin
Errol Damelin explains why his short-term ‘payday loan’ provider is not merely a recessionary fad
Imagine you’re determined to start a consumer internet venture, and are about to spend a year researching potential options with the help of an experienced angel investor and internet entrepreneur.
It’s unlikely that the controversial and fragmented industry of short-term ‘payday loans’ is top of your list of prospects.
Errol Damelin, however, wanted a business that was scalable, responsible and user-friendly – and also happened to allow consumers to plug shortfalls in their cashflow with short-term loans charged at eye-watering APRs.
“I spent 12 months working out whether it was possible to totally automate the process of an application and the delivery of cash, plus whether it could be done in a way that was responsible, ethical and transparent,” says Damelin.
The result is Wonga, which, says the South Africa-born entrepreneur, does all of the above. New users can initially borrow anything from £50 to £200 for between five and 30 days, with more available for those who build up a strong credit score with the website. The target market is 18 to 40-year-old internet users who are employed and banked.
“It’s mass market, not sub-prime. It’s for people earning a salary who run out of cash for things they need or want from time to time,” he says. “A lot of people are occasionally short of cash. That’s the reality when you’re on a fixed salary and your costs are variable.”
There are a number of existing firms catering for the ‘payday loans’ market, but it’s an industry that has traditionally been associated with punitive interest rates, rolled-over debts and the exploitation of the financially vulnerable. Wonga, Damelin insists, is different. “We weren’t going to start the business unless we felt we were genuinely being responsible about it,” he says.
Crucially, unlike credit card companies and free bank accounts, the London-based firm makes its money when customers pay it back. The site strongly discourages extending the term of any debt through a strict credit rating system, and numerous messages throughout the application process which mean a user “can’t take a loan without knowing exactly what they’re doing”. This aligns its interests with those of its users, Damelin argues.
The founder says users respond well to Wonga’s “openness and transparency”, which allows them to have precise control over the amount they borrow and the length of the loan. Applications are accepted or declined almost instantly, and a borrower can have cash in their bank account an hour after logging off the site.
Making the site tick, Damelin explains, was a major challenge. “The back end is super-complex,” he says. “We couldn’t leverage any software that existed in the industry, because of the flexibility we wanted to give our customers.”
The result is a firm more akin to Amazon than a bank, with proprietary technology, light touch customer service and a slight majority of its headcount consisting of “technology people”.
With the help of experienced angel Robin Klein and co-founder Jonty Hurwitz, Damelin launched the site in 2007 on the back of £3m of venture backing from Balderton Capital, and consistent successes have seen it “over-deliver from the start”.
Wonga has lent around £20m, expects revenues to hit £15m this year, and is already turning a profit. In June, Accel Partners, the backers of Facebook, led a £14m round which confirmed the company’s status as one of the most exciting web firms in the UK.
But what about the site’s ludicrously high APR, which stands at 2,689% on average? An unfair metric for a short-term loan that doesn’t have compounded fees, Damelin argues. “You’d need a daily or monthly equivalent price to compare like with like,” he says. “We’re much cheaper than the banks if you’re going over your overdraft limit.”
The perennial nature of the problem the site addresses means it’s not just a recessionary success either, he insists. “It’s less about the economy and more about staying focused on the problem we’re solving. We’re meeting a consumer need, and people always come back to reliability.”