So there I was, surfing the web, when I came across this awesome little company called Wonga. A writer named Umair Haque was criticizing this payday loan (PDL) operation and, as PDL opponents often do, got almost all of his facts wrong, while tossing in irrelevant hyperbole along the way.
Sigh. Here I go again, having to debunk the outrageous claims of another writer.
First, Mr. Haque didn’t even get his math correct. 66 pounds of interest on a thirty-day loan of 200 pounds amounts to 396% APR, not 2689%. But APR isn’t even of concern here. Or rather, it is only of concern to those who have never used PDLs, who have never stepped into a PDL store, or spoken to any PDL customers.
The customers themselves will tell you that APR means nothing to them. Their decision to use a PDL depends strictly on the flat fee as compared to other options. It’s no different than shopping around for an appliance.
Mr. Haque calls the VC firms’ decisions to invest in Wonga a “breathtakingly poor choice: an economically, strategically, compeitively and ethically bankrupt choice to make”. He is wrong on every single count because he lacks all knowledge of the PDL business model — one that has been working for almost twenty years.
Economically: Mr. Haque claims Wonga is designed to extract value, not create it. Wrong. Not two paragraphs earlier, Mr. Haque decries the “biggest debt crisis in a century”. PDLs provide credit to the very people who need it most, when they need it, far more quickly than they could get anywhere else, and in some cases, for less than they’d have to pay elsewhere. With that credit, people create value for themselves by getting their car fixed, paying for a doctor visit, or getting an air conditioner for their home. It also creates value for society as that money is pumped into the economy.
Strategically: Mr. Haque believes that the current and future economic situation will not be kind to Wonga, and asks if Wonga can keep its default rate under control in a deep recession. The answer is that it depends entirely on Wonga’s underwriting, which is proprietary. Over the past twelve months, U.S. payday lenders have seen a small uptick in defaults, but nothing that endangers their survival.
Competitively: I agree that Wonga is hardly a disruptive business model. However, Mr. Haque postulates five ways Wonga’s business will be disrupted, none of which have come to pass in the twenty years since the inception of PDLs, and none of which pose any serious threat to Wonga’s model.
Offering low-grade borrowers disruptively lower interest and/or long loan durations. This is known as installment lending, and has been in existence for some time. Although more U.S. lenders are offering this product, demand for PDLs since the installment products inception has increased. As for lower interest rates with the same duration, a casual glance at the SEC filings of public companies demonstrate that charging less than $1 (or pound) per hundred borrowed simply will not work at a storefront or online. Those that have tried to do so have already gone out of business. When legislation has placed significantly lower rates in place, PDLs have exited those states due to an inability to generate enough revenue vs. expenses and defaults.
Offering borrowers less risky debt. The only credit union to date that has been able to offer a competitive rate has been Goodwill Industries at a rate of $9.95 per hundred. And they make no profit from it. P2P loans are a great idea — or rather, they were — until the SEC put the kibosh on them. In addition, they are not available for immediate, short-term use. It takes weeks for a borrower to have their demand met.
Offering Microfinance. The only difference between PDLs and microfinance is that peer pressure is what gets borrowers to repay lenders in the absence of legal obligation. Nice idea for the government-subsidized Grameen Bank in Bangladesh, but it would never work in the Western World. Why? First, cultural differences. 97% of Grameen’s borrowers are women in Bangladesh. You think that model is going to transfer over here? Second, transactional costs. Even the villainous Self-Help Credit Union, which receives low and no-cost government grants to use to lend out to customers at 10% APR, can’t profit in this model. So instead they require borrowers to open accounts with the credit union — so they can ding those folks with overdraft fees that are three times more expensive than PDLs!
Offering personal CDS and credit insurance. Credit insurance products already exist. They are not widely utilized because most customers are smart enough not to spend money to insure a loan they’ll be repaying in two weeks, and some states won’t even allow the product to be sold.
All of this begs the obvious question — if a better product existed for any party to the transaction, why hasn’t it appeared in the marketplace? Because there isn’t one. Even when the world was awash in money, the smartest minds in the world couldn’t figure out a way to undercut PDLs.
Ethically: Oh brother, the old usury argument. Already debunked. And Wonga’s incentives aren’t perverse — they only are in Mr. Haque’s eyes because he doesn’t understand the product’s usefulness to those who actually use it of their own free will. Incidentally, a product itself cannot be moral, immoral, ethical, or unethical. This is the oldest philosophical fallacy in the book. An object is inert. It is neutral. How the object is used is what matters. Guns don’t kill people. People kill people. The gun itself is a neutral object. Think it isn’t? Think a gun is inherently evil because it kills? Suppose it’s used to kill Hitler? Think about that.
In the end, Mr. Haque seems to decry the “economic nihilism” of various venture capital and certain companies and their products. This is an untenable intellectual position to hold. The primary purpose of VC is to make money. Period. If you want to get on your high-horse and only invest in “moral” industries, you are setting an arbitrary goal that renders your values meaningless.
As for creating “authentic, meaningful value for people”, Mr. Haque needs to get out of his office and pay a visit to his local PDL stores. He might be shocked at the value that PDL customers feel the product creates for them — and not the alleged value stripped from them by uneducated critics.