Personal Loans Now takes a closer look at Funding Circle and Wonga. Where did Wonga go wrong and how did Funding Circle make it?
- How similar Funding Circle and Wonga are
- Why Wonga failed
- Whether Funding Circle could face similar problems to Wonga in the future
Funding Circle and Wonga
At first sight, the two firms, Funding Circle and Wonga, would appear to have nothing in common apart from the fact that they are both new-style companies which filled a gap in the lending market not covered by High Street financial institutions. However, we will take a closer look and examine their similarities and differences. We’ll then examine the reasons for the collapse of Wonga before questioning whether the success of Funding Circle will definitely continue to succeed. In particular, what would happen to the peer-to-peer lender if the UK were to experience another financial crisis on the scale of 2008?
How Similar are Funding Circle and Wonga?
Funding Circle and Wonga share a number of similarities. Personal Loans Now, a superior personal loans lender and an exclusive broker, takes a closer look at them.
Use of Technology
Wonga had styled themselves as a new kind of digital innovator which used groundbreaking technology to lend to people at the right price. There’s no doubt that it would never have enjoyed the success it did if its rise hadn’t coincided with the increased use of smartphones. Quick online loan applications were both simple to make and above all, fast, which encouraged more consumers to take out payday loans. The business model of the peer-to-peer lending platform Funding Circle also uses high-tech sophisticated data analytics to match lenders with borrowers making the service convenient for its users.
To a certain extent, both Funding Circle and Wonga targeted people who mainstream lenders had excluded. Wonga used clever marketing and advertising techniques to reach consumers who High Street banks had turned down, as being poor risks for credit products. Their blanket campaigning was highly controversial and received wide-scale criticisms from both politicians and the media. Their use of puppets was mainly targeted for trivialising the issue of loans and consumer debt.
The motives of the founders of Funding Circle when they established their company in 2010 were more altruistic than Wonga. They state that they intend to lend to SMEs which faced harsh lending conditions as a direct result of the credit crunch. Many borrowers had already been rejected by mainstream lenders while their lenders were receiving poor returns on their savings.
Peer-to-peer lending platforms like Funding Circle have, however, received a degree of acceptance which Wonga never did. Even Innovative Finance ISAs for P2P lending has been approved by the government and carry a tax-free allowance on earnings.
Both companies saw their companies’ revenue grow rapidly in its initial stages. By 2011 and after only 5 years in operation, Wonga had tripled its profits to £45.8 million on revenues of £185 million from the issue of 2.5 million loans.
Bearing in mind its more specialised market, the growth of Funding Circle has been equally impressive. In 8 years, it has acted as a middleman for 50,000 businesses and 80,000 investors. Its half-year revenues of 2018 were £63 million compared to £41 million in the same period in 2017. The question is whether this growth can continue and if it is threatened in any way. Before we look at the possibility, let’s explain why Wonga was recently forced into administration.
Why did Wonga Fail?
The reasons for the failure of Wonga are two-fold. The role of regulatory changes and the increased number of claims against the company through the Financial Ombudsman. The business model that Wonga created became unsustainable as soon as the FCA took over regulation of the payday-lending market. The new regulatory body made it clear that they were going to clear up the market and put a stop to the unfair treatment of borrowers. The price cap restricting how much the firm could charge in interest and other loan fees saw their revenue plummet.
It’s quite possible that Wonga could have weathered the effects of stricter regulations if they hadn’t also seen a massive rise in the number of complaints against them. The vast majority of which were about loans issued before 2014. According to FOS statistics, in 2015 there were 269 complaints filed about the payday lender, but in the second half of 2017, this number had rocketed to 2,347. The main reason for this increase had been the involvement of claims management companies which had especially targeted those who had taken out payday loans in the past.
Could Funding Circle Face Similar Problems to Wonga in the Future?
It’s generally agreed that the underwriting methods of Funding Circle and Wonga were different. Funding Cicle’s method are much better than the Wonga model which relied heavily on high interest rates to cover any defaulters. However, what would happen to Funding Circle if the UK faced another financial crisis?
Its founders are quite confident that they would be able to continue. They say that they use the same stress-testing criteria of the Prudential Regulatory Authority to check the resilience of any borrower in case of an economic downturn. The way that they work as an intermediary means that they would be less exposed than many High Street banks. In fact, it would be their investors who would ultimately pay the price of any defaults. For this reason, their relatively new auto bid system requires borrowers to spread their investments more widely. This protection is vital as the Financial Services Compensation Scheme doesn’t cover the peer-to-peer lending market if something goes wrong.
Funding Circle’s main difficulty in the case of a financial crisis would be the numbers of investors. They would probably go down while borrowers would put expansion plans on hold until the crisis had passed. This would affect how much they would receive in commission fees.
What Can I conclude about Funding Circle and Wonga?
Despite the similarities between them, their present situations couldn’t be more different. In the same month that Wonga went into receivership, Funding Circle was finalising its plans for a £2 billion flotation on the stock market to raise £300 million in revenue. However, the ultimate test will come for the peer-to-peer lending platform if or when the UK faces another economic downturn.