Payday loan giant Wonga.com has received a £10 million cash injection from its investors to avoid going into administration. The controversial company was once hailed as the fastest growing company in Europe and had plans for a £1 billion flotation. However, the firm has faced difficulties after a surge in compensation claims and a regulatory clamp-down on the high-cost loans industry.
The company had a variety of backers including Israeli investors - but emergency fundraising in the last few weeks caused their original investors of Accel Partners and Balderton Capital to offer a bailout solution.
Wonga started in the UK around 2005 and became synonymous with online lending through a variety of prime time TV advertising, bus adverts and sponsorship of high profile football teams including Newcastle United, Blackpool and Hearts.
With expansion in South Africa, Spain, Poland and Canada by the year 2012, the company was poised for a £1 billion flotation in the US but today the company is only valued at £23 million.
When the Financial Conduct Authority took over as the City regulator in 2014, it introduced a price cap in the payday loan industry and enforced tougher checks to be carried out by lenders. This included adequate credit and affordability checks to ensure that customers can afford to repay their loans without falling into financial difficulty – leading to higher underwriting costs and lower margins for funded loans.
As 2014 continued, Wonga was forced to write off £220 million worth of debt for granting bad credit loans to customers who could not repay. The company has continued to make losses since the introduction of the Financial Conduct Authority and has slowly been overtaken by companies in the sector offering middle term, instalment loans.
Wonga has suffered at the rise of compensation claims for miss-sold loans, something known as legacy loans. This has become a fast-growing business for claims companies with the fast approaching deadline for PPI claims.