Sunday, September 16, 2012

Wonga: a successful British tech company worthy of UK Government support

MUNICH, GERMANY - JANUARY 23:  Errol Damelin, ...
Errol Damelin, CEO of Wonga,
How often do we hear the refrain “why doesn’t the UK produce the $bn companies that are churned out in Silicon Valley?”

Reams have been written about this issue and many hours have been spent in think-tanks – in and out of Government – figuring out how we can get the universities to commercialise their innovations, how we can pump more money into start-ups, how we should be training more engineers, more entrepreneurs, or how we can create effective clusters etc.

Successive governments have created enterprise schemes including NESTA, The Technology Strategy Board and, more recently, Tech City. Countless millions have been spent too – some of it to good effect, but much of it wasted. This Government has adopted a supportive and pro-active approach and some of the initiatives are having a very positive effect [see my post:  http://the-accelerator.blogspot.co.uk/2011/03/i-think-uk-government-is-listening-to.html ].

It is widely acknowledged that one the major factors encouraging innovation and entrepreneurial activity is the celebration of success and the making of ‘celebrity’ entrepreneurs. We need the Zuckerbergs, the Bezos’, the Elon Musks. And we do have Richard Branson, James Dyson and Stelios – all great business innovators – but where are the new tech heroes (who have not sold their businesses) whom young entrepreneurs can aspire to emulate?

Based here in London, Wonga is one of the fastest growing companies Europe has yet seen. It may well rank in the top five growth businesses of all time by these measures. After less than five years, it is employing more than 300 people and is still growing at an enormous pace. What’s more, it is continuing to innovate and develop new products spending millions a year on its NPD (new product development) and R&D activities. 

Its results for the year ended 31st December 2011, just announced ... just serve to emphasise how strongly the company is growing and just how many customers it is now serving.

  • Revenue growth, up 225% to £184.7m
  • Net income up 225% to £45.8m
  • Number of loans provided  up 296% to 2.46m
It employs engineers, mathematicians and statisticians (more than 20 in its risk team alone, including several PhDs). It is a truly international business employing people from more than 40 nationalities. And in its founder and CEO, Errol Damelin, there is a charismatic, thoughtful and hard-working leader and entrepreneur - in many ways just the role model the UK Government should want to embrace and promote - or at the very least endorse.

In addition, Wonga is exactly the type of company that we love to hail – disruptive of a failing, oligopolistic industry and doing so using really smart technology to make its processes super-efficient and its service designed around its many customers. Independent research shows they generally love using it as a result and its Net Promoter Score consistently exceeds 70. UK Banking average is Zero.

It is either helping to solve a problem which has existed and been ignored for many years – or is facilitating and empowering hundreds of thousands of consumers. Probably both.

Yet there is a problem. Regulation of the financial services industry is complex and difficult, lags behind product innovation and is highly political. It was not designed for entirely new products such as very short term loans offered on the web in ‘real-time’ and with interest applied daily. The entirely inappropriate Representative APR measure, which is required to be prominently displayed, despite the average duration of these loans being little more than a couple of weeks (16 days), has been more of a focus than the innovation or customer feedback.

It is difficult to think of a more certain way to potentially mislead or confuse consumers, than to show them a calculation based on an annual loan and a daily compounding of interest. The real test is customers being told in clear terms – and up front - how much the loan will cost including all interest and charges in a transparent way .Would that all financial services companies provided that information.

Wonga’s APR has been a lightning rod for virulent and often completely unjustified criticism from sections of the media and some politicians. Many assumptions based on a nonsense number or instances of the company making mistakes has made it a ‘controversial’ company.

But rather than be blinded by hype and headlines, this Government should be looking at the real facts, reading the customer research and hailing Wonga as a triumph of British technology innovation and entrepreneurial brilliance. They should accept the advice of the recent BIS Select Committee that included the strong suggestion that “APR should no longer be used to measure and compare the cost...” Rather than relying on APR, they should enforce clear and upfront indication of the total amount to be repaid as the minimum requirement for all providers and [implicitly] endorse the important role that Wonga is playing in the modern economy.

Wonga has developed an important service, which has enabled many hundreds of thousands of users to manage tricky cash flow situations and not be left in long-term debt or paying a price they weren’t expecting. It’s a difficult subject, but this company really ought to get the credit it deserves. Instead, I have read many column inches on Wonga, most of it regurgitated from snippets of factually incorrect or grossly misleading reports.

Wonga recently opened a new site: www.openwonga.com on which they have published a raft of statistics relating to its business - these provide real insight into the scale of the business, the profile of its customers and details of the loans its makes. 

I do understand the government’s dilemma. Speaking at the Times CEO summit earlier this year, George Osborne ticked off the CEOs and chairmen present for not making the case for free markets and wealth creation to a ‘public that badly needs to hear it’. The current climate, he argued, makes it difficult for the Chancellor to cut corporation tax and offer other inducements to business.

Wonga is not asking for either. Just for some recognition for the outstanding achievement of building a world-leading technology company here in Britain … and the modernisation of the regulation of financial services to create a level playing field (*) and recognition of new financial products unlike any previously offered.

(*) Banks providing unauthorised overdrafts have a 'carve out' in the regulations which does not require them to publish the effective APR of these 'loans' which would run into many thousands in most cases.

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