Wonga aiming for right local formula

Online-only micro-lender, Wonga.com, has enjoyed a warm response in South Africa, bringing quick money to “tens of thousands” of customers, despite operating in a market rife with fraudulent activity.

Wonga.com, which launched in South Africa in May, is a website which offers short-term loans to qualifying customers.

The company was started up in 2007 by Errol Damelin and Jonty Hurwitz, two South African entrepreneurs, and operated primarily in the UK before opening up to the Canadian and SA markets.

The micro-lender offers small, short-term loans starting at R2,000 for first-time clients and up to R8,000 for long-time users who have built up a strong trust profile with the company.

So far the company is seeing “tens of thousands” of clients making use of its services, which, in just over a month, shows a firm entry into the local market.

“Our founders are South African, so it was a natural choice to bring Wonga.com ‘home’ to SA,” said CEO for Wonga South Africa Kevin Hurwitz.

“However the decision wasn’t merely a sentimental one. South Africa is seen by the company as an important developing market in which there are many opportunities and lessons to be learned.”

Critical rates

While Wonga.com is enjoying a warm reception in the South African market, in the more mature UK market, the company has come under some sharp criticism.

Topping the buzz surrounding Wonga’s UK operations is the 4,128% annual percentage rate (APR) – which the company is obligated by UK law to display on its home page.

The APR shows an annualised interest rate on any loan, and is calculated through the rate and payment period, multiplied by the number of payment periods in a year.

Wonga has disputed the high percentage, however, claiming it is a distorted compounded figure, with the real annual interest sitting at 360%. The company offerend clarification on it’s UK site as to why the APR figure was so high.

“The calculation required by law means that, where a loan is not taken out for a year, the interest rate must be compounded the same number of times the actual loan period would fit into a year,” Wonga said.

By contrast, the annual interest rate in South Africa is at 60% (compared to the UK’s 360%); with the monthly rate at 5% and the daily rate falling slightly under 0.17%.

The company boasts its “clear, up-front pricing with no hidden costs” structure, with charges attached to the loan being seen and viewed as the loan amount and pay-period are selected in real-time.

These charges are calculated as follows:

  • Service fee: R50 per month (+VAT at 14%)
  • Initiation fee: 15% on the first R1000 plus 10% of the amount of the agreement in excess of R1000, but never to exceed R1000 (+VAT at 14%)
  • Interest: 60% per annum or 5% per month – (calculated at 0.1667% per day)

The rates are in-line with the structures set out in the National Credit Act [PDF].

Targetting the market

The company has also attracted criticism in the UK for targeting low-income customers who often end up over-reaching their borrowing and subsequently accrue huge charges.

Locally, however, Hurwitz told BusinessTech that the company takes responsible lending into serious consideration.

“Part of that is a commitment to financial education. There are several places on our website where we discuss protecting one’s personal details, advice on managing debt, understanding financial jargon and similar issues.”

When asked about the rate of defaults in loans, the CEO would not give an exact figure.

“We don’t give specifics on these kinds of things, but we are comfortable with the our default rate currently. In the UK, which is a more mature business, the rate is comfortably within single digits,” he said.

The lender uses a patented algorithm, which crunches “literally thousands of pieces of publicly available data points” to make immediate online credit-decisions. According to the company, about only 25% of applications are granted loans.

“We rely strongly on a system of trust. We expect customers to pay us on time, because they have been able to choose the repayment date that suits them best. We don’t rely on installments, but customers repay in a once-off payment,” said Hurwitz.

“Obviously we understand that for a minority of customers circumstances may change that makes it impossible for them to keep to their commitment, and customers are always encouraged to call in and talk to us – it is often possible to come to an arrangement with them,” he said.

Tackling fraud

One of the biggest issues facing an online-only company that doesn’t rely on hard-copy approvals and human assessments is fraud – particularly in SA.

“Obviously fraudulent activity is rife in SA and we have encountered various forms, including identity fraud,” said Hurwitz.

“We are confident that our systems will identify potential fraudulent applications, but on the few occasions when fraudsters are able to take a loan using someone else’s details, we act as soon as an individual informs us they have been a victim,” Hurwitz said.

“We are able to supply certain information to the police and we are also a member of the SAFPS,” he concluded.

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Wonga aiming for right local formula