Wonga: Hot New Trend or Worst Business Model Ever?
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A Kinder, Gentler Kind of Payday Loan?
What is Wonga?
Wonga is a new, online cash advance service that is attracting venture capitalists faster than cow poo attracts flies.
Prospective Wonga customers fill out a brief online form that includes their personal account information and weekly salary, and if approved see a cash advance deposited in their bank account the very same day.
Wonga's website is cute and friendly, with chirpy little cartoon people who explain with cartoon smiles in simple language why a 2689% Annual Percentage Rate is not a bad thing!
Come on, people! Don't be so freakin' stodgy! Twitter and tweet! Wonga and woogie! It's an option! A choice! An opportunity!
But seriously, is the fact the poor people can now get into money trouble in the privacy of their own homes without even changing out of their pajamas a good thing?
Or is this development a very, very bad thing?
Economist Umair Haque at The Harvard Business Review thinks it's a very, very bad thing. In a scathing online essay Haque attacks the perky start-up calling it "...a breathtakingly poor choice," one that is "...economically, strategically, competitively, and ethically bankrupt."
In fact, Haque calls Wonga "...the worst business model in the world."
He then goes on to sarcastically suggest some other horrible online start up ideas, such as:
- An E-Bay Organ Market so people living in the third world can auction off their kidneys and other extra body parts to rich Westerners.
- A Face Book-Type Social Networking Site for Global Arms Traders.
- An Online Network of Gym Enthusiasts Who Shake Down Business Owners by getting them to pay not to be harassed. (What a great idea!)
For a minute after finding this essay I was stunned. I'm not sure how long I sat there in shocked silence before I was able to come back to my senses and start asking pertinent questions again; questions like:
- What was I doing reading The Harvard Business Review? (I must have gotten lost on the way to Zappo's. It happens. Zappos, Snappos, Wongos, Wongas... Who can keep these web sites straight anyway? I'm old.) And...
- Was this really a Harvard economist expressing moral outrage at free market business practices? Is that even allowed at Harvard? Is it legal? Is Haque safe? Should we maybe spirit him away fast to some location where he won't be harmed; somewhere he can express these extreme views more freely like, I don't know, Iran or Pakistan?
You know that things are really getting ugly when mainstream economists writing for elite online business rags start expressing moral outrage about usury and venture capitalism.
I mean, that's sort of like finding an online essay in which Larry Flynt gets whipped up about internet porn crossing some kind of good taste boundary and declaring in summation, "it has to stop right HERE, right NOW!"
You just don't expect that of Larry Flynt.
And you don't expect this of The Harvard Business Review.
To bastardize the famous quote by Johnson, it's like coming across a dog voluntarily walking on its hind legs. The wonder is that it is done at all.
Haque goes on to call Wonga an unnovation (as opposed to innovation--great word!) because "...Authentic innovations create real economic gains. Like Hummers and McMansions, Wonga ... offers no gains to efficiency or productivity. That's because it is designed to extract value — not create it. It is, in a nutshell, the [same] game of musical chairs that caused the global economy to melt down."
But Haque doesn't stop at moral outrage. No way, he's just getting warmed up.
He goes on to explain in detail exactly why and how Wonga is strategically, ethically, and competitively bankrupt, and he outlines all the specific ways it will ultimately be disrupted by better ideas on its way to inevitable failure and loss. In other words, Haque doesn't just take the moral high road and sniff, "Exploiting poor people is terrible!" He explains persuasively why exploiting poor people is bad business and will ultimately be failed business.
The root of the problem, Haque believes, is a lack of leadership in the international business community that he calls economic nihilism: the bubble capitalism belief that the rich can continue to prosper even while everyone else becomes worse and worse off; the conviction that it's theoretically possible and economically desirable to create zero value while booking maximum profit.
I admit, I found this kind of talk refreshing. Even exhilarating
Haque ends his rant with a solution. That's right. Haque's critique of Wonga and its jackal investors goes beyond mere analysis and ends with a bit of upbeat practical advice, a suggested new direction for future business models.
What is Haque's 'new' idea?
It's pretty cool, but being an economist it's not that easy for mere mortals like us to understand. So, in the interest of not getting it wrong, in the interest of not making a Harvard to Earth translation error, I'll quote Haque directly:
" [It's] simple. Don't make toxic stuff that's bad for people. Make awesome stuff that makes humans meaningfully better off."
Amen brother Haque. Amen.
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Comments
Hi Ron--Yes, I thought so too. Wongo sounds like an encapsulation of what's killing our whole economy, and I really like how he put it together. Thanks for taking the time to read and comment on it. :)
Sounds like what brought us in the trouble of world recession in the first place. First overspending on credit cards, now wanky wonga, when will we ever learn? What happened btw to saving money to be able to afford something in the future???
Hi Sybille--Weirdly, what happens a lot is that people get in trouble with all the tricky bank fees here and end up on Checksystems, which makes them unable to get a checking account anywhere. So they end up going to the payday loan shops to cash their checks because the bank won't have them, and from there it's easy to suck them into the bad payday loans. People do have to take responsibility, but the system does set them up to fail. If you make $8 an hour and work full time, you clear about $280 a week. Bounce one check because of a weird posting policy and have others follow and you can end up with that much in fees in a single day. Most banks then charge $8 per day additional for every day after the 3rd one you are overdrawn, which means poor people get kicked out of the system forever. Nice for the banks, bad for poor people.
When I worked at the bank I used to tell people all the time, "Take your money out of this account. It's killing you. You can't afford it." No wonder I didn't last there.
It's hard to save much money on those kinds of wages. I think you'd have to live with your mom or something. But I know what you mean. Thanks for commenting! :)
An example which I think runs parallel even though it is not about payday loans . . . . My doctor tried today to schedule me for a cardiac procedure which needs to happen fairly soon. But the hospital would not schedule the procedure unless I put $10,000 on the table before going in. I don't have that much. Fortunately, I have an empathetic doctor who has found a way around the hospital blockage for the moment. But driving home, I rode with the eery realization that there have to be tens or hundreds of thousands of people out there right now who carry some sort of ailment which they know could kill them at any moment, but which they do not treat because they cannot get by that threshold financial requirement. They don't take the step because they have to use what they have to keep their families going. And the irony, of course, is that the result for many of those people will be that their families will lose them. This level of insensitivity, which obviously permeates all aspects of our lives, is more than a topic for political debate: it is spiritually unconscionable.
Steve--I agree. Somehow, over the past 30 years America has accepted the worship of profit as a religion of sorts and even now, with conditions as you describe, people passionately argue that the fact that some people may die for lack of care is their own 'fault.' It's very, very sick---I mean sick to the point that it makes physical sickness look healthy by comparison. I don't know what has happened to people's hearts but it is truly horrifying. I am glad that your doctor was able to work around the money issue. We know of a coworker who is dying of cancer because she can't afford treatment. Her cancer is treatable, but like they did with you, they want money up front, lots of money, and she doesn't have it.
I have no health insurance since leaving the bank and can't get any because of my age and 'pre-existing conditions' and at 56 I'm too young for Medicare. I'm not unusual by any means, but even with insurance we racked up thousands in medical bills in a 2008 and that same year I chose to stop taking medication I need because we just can't afford it--we need the money to pay the mortgage and pay our bills.
I'm OK so far, but I think the same thing as you---how many people live like this now? I think lots of people. It encouraged me to see an economist calling something both evil AND stupid--which, often, both do apply. Take care and thank you for your comment.
@Pam- I hadn't realised that you could be banned from having a check account in the US. In my country anyone can have a "everyday" account - there is no credit on it - but the bank still makes plenty from fees so why would they refuse them. Also no employer pays by check - its a think a requirement (govt) that you get paid to a bank (or credit union) account. That stops the whole waiting for checks to clear.
@Steve - that's why some of us are happy to live in "socialist" countries where your op would be based on urgency not the ability to pay
Not to Wonga! We have a lot of that predatory lending here in Tennessee as well. Great Hub.
Hi Lissie--Yes, it happens all the time here. After only a couple of months at the call center job at the bank it became apparent to me that the fee structure was a not-so-covert way of making sure that poor people got booted out of the system.
One of the most egregious policies was that of 'posting on available balance,' which simply meant that if someone deposited a paycheck on Friday, the money would not be available to the them to spend until the following Tuesday, even if it was written on a major bank from a corporate business the size of a small country. Of course it is mostly poor people who get pay 'checks' (as you note, most people get direct deposit), so when these people went to the grocery store over the weekend and their check or debit for groceries and whatnot hit Monday--boom, overdrafts, often lots of them, at $36 a pop.
I routinely saw people with $300-$700 in fees alone, and after 30 days if the fees weren't paid the account was shut down, the fees went to collections, and the person went into the Check Systems database, meaning no checking acount at any American bank anywhere. So they would have to go to a Cash Advance place to cash paychecks then, because otherwise the bank would just keep the paycheck against the outstanding fees.
The banks defend this practice saying they have to cover losses. I think it's crap. I think these exorbitant fees should be limited and this particular practice should be outlawed as discriminatory.
RVDaniels--Thanks for coming by. Lots of it here in MI too! BTW I saw we are up to 14.1% unemployment as of today. Ugh.
" [It's] simple. Don't make toxic stuff that's bad for people. Make awesome stuff that makes humans meaningfully better off."
Unfreakin believable that this issued forth from the lips of a Harvard economist! I'm going to the Harvard Business Review site right NOW! I'm not kidding.
So Pam, in addition to a nanny state you want nanny banks too, right? For some reason I always check when money from my deposit become available. May be this is exactly what keeps me from becoming poor ;)
I don't understand how you can withdraw against an uncleared check. In Australia - you would get a declined on the ATM or eftpos machine and no one accepts checks at the till... That's how the banks protect their interests here - of course they have the money all right - just collecting the interest on it over the weekend!
Are prepaid debit cards an option in the US - I just swapped over to one because I can use it online like a normal mastercard but access my current account balance with it
Hi CWB--Yes, I was shocked too. Actually it's a pretty interesting site.
Misha--I've llived in the U.S. my entire life, and for 40 or 45 of those 56 years payday loan shops didn't exist and no one got this country mixed up with the Soviet Union, but you're right. Poor people did it to themselves and the free market regulates itself and we are about to become Communist. Thanks for pointing that out, I never heard that before. :)
Lissie--About two months before I left the bank they changed their fee policies again so that people could take money out of an ATM even if there was no money in their account. They told us they were doing that SO THAT they could generate more fee revenue. Before that change, I always told people "Use cash." After that change I told them, "Take your money out of this bank if you can't keep perfect records like Misha you little commie bastards." We do prepaid debit cards here but you have to pay an extra fee for them. You can't use your debit card online? Does it have a VISA or MC logo on it? I don't buy much online but when I do I use my debit card.
Why, I'm shocked, but shocked that a Harvard fellow would come up with such an article. Shocked I say! Where are my salts?
Howl! I feel like standing up and giving this Haque guy an ovation :-)
I had hopes that the poor economy had put a screeching halt to people getting bad loans for things they did not need. I guess I was wrong.
Hi Elena--I had the same reaction exactly. What I really liked was that he didn't really focus on politics so much as the economics behind the business model being bad. I mean, right away Misha tried to rile me with the political angle, but that's what was cool about Haque's essay--He wasn't calling for government interference, he was just saying whoa is this a bad business model or what? It is and here's why...
Erick--Most payday loan shops are owned by Citi and BOA. People go to them by and large when they get kicked out of banks. Before the Reagan era people didn't get routinely kicked out of banks and the interest these shops charged was illegal. There weren't any payday loan shops, just loans shark and pimps, who occasionally even went prison. Sometimes. Not much, but once in awhile.
Today most people get sucked in by cashing their paycheck at these places and then their car breaks or they need to pay a doctor or whatever, so they take the loan and don't understand the consequences (or don't care because they need the loan). No one makes them borrow the money but lots of financial experts think these shops should be outlawed, it's not just me and a couple of rabid lefties. It's a fairly ugly practice.
I did a lawsuit against a big bank (First Interstate, which became Bank One, which became Chase) when a bank manager ruined five customers' lives by making their funds unavailable to them because she did not like the religious beliefs of those customers. In the course of the two year litigation, all my phones were bugged and a truck made a run at my children twice, among other things. In the course of that litigation, I found out a lot of things. For one, the practice of holding funds is strictly regulated by government rules (it's called Reg CC), but the banks regularly violate those rules and answer to no one. I also found out that the banks share private information about customers with each other on a regular basis. I found out that every branch makes substantial mistakes (mistakes or "mistakes") every day, and makes no amends to the affected customer. As a result, for instance, I always hold my deposit receipts until the bank statement, since they are my only means of confronting a mistake. They do this because they know their customers are ignorant of the rules and/or lack the ability to confront them. That's why they hit us so hard when we did confront them. The lawsuit eventually went away, partly because First Interstate got gobbled up and many of the offenders found themselves on the street, but the practices did not change because the banks knew they would not get challenged again. (My clients could not afford the lawsuit, so I paid for it, and it left me broke. Who else is going to follow that example?) The cancer was there long before the meltdown (the lawsuit was in the early 90s): it just took the meltdown for every one to see.
Steve--I can confirm that everything you say here is not only true but standard. I've written extensively about my frustration with my last job--18 months and a major regional bank call center in 'customer service.' That bank went through a forced sale (by Treasury) in January to another large bank because it was basically insolvent after buying up lots sub prime loans and lenders and expanding into Florida to sell predatory mortgages.
But what really got to me was what you talk about here--how they ruined people's lives often over things that were either 1) the bank's fault, or 2) the fault of a merchant (for example, double debiting a card or direct utility payment and then refusing to refund hundreds in OD fees).
Refunding fees under ANY circumstances was the fastest way to get yourself fired. What mattered to the bank was 1) don't refund fees under any circumstances, and 2) sell loans and deposit accounts. The customers? Screw the customers. That was the bank's attitude and it wasn't even hidden. The people who made it at the bank were either completely delusional or really nasty or both. Lots of employees hung on too long and got sick. They ground through personnel like so much human hamburger. I hated every second of it, and finally got the guts to leave when I had what looked like a heart attack at my desk. Was taken to the emergency room and kept overnight for a stress test, which I passed. I never went back.
I live in Michigan, so that maybe wasn't smart, but if that place taught me anything it is that some things are more important than money. I'm unimpressed by Obama's new regulatory package. I fear that even if we get out of this recession, banks will just create another bubble and it will all happen again. Nothing substantial is really being changed, and as you rightly point out, they don't obey the law anyway.
What astonishes me Pam, is that you, and others based in the USA, post this info on the banks in such a matter of fact way. It's as though the American banks are above the law, above regulation and sanctions. There is no happy ending to all this. No nanny state to pick up the pieces. The people running the banks, and operating schemes such as Wonga are literally bleeding the country white. They won't be satisfied until the last drop of profit is wrung out. Thank goodness for guys like Haque even if he is a lone voice of reason, we can but hope that others will soon join him.
Great hub Pam. We too have these payday loan schemes which do not seem to be subject to the usury act or the National credit act both of which regulate the maximum interest chargeable on a loan.
We also have a breaking scandal around a Ponzi scheme which has involved mainly very wealthy businessmen and companies (so far hopefuly not affecting pensioners or retirement fund investors). It is understood that these investors have lost millions. One single investor was in the hole for some R50,000,000. A Ponzi scheme is named after Ponzi who devised a pyramid scheme which pays early investors from the funds of later investors and not from trading. Ponzi schemes are illegal in most countries in the world.
Hi Amanda & sixtyorso,
What bothers me most about it is that we aren't letting these bigs banks fail (or AIG either) and we aren't making them break down into units that are NOT "too big to fail." In fact, we are keeping them alive at insane cost to the rest of us. It seems the 'moral hazard' only applied to working people and especially to the working poor. If bankers make risky bone-headed decisions that fail or use exploitive crappy business models that only extract profit and create no real value, when their crappy management cause the company to lose money we just give them some money so they can do it some more.
Amanda--you're right, they seem to be accountable to no one, and even though I am glad Obama won and I do have confidence in him, it is clear to me the big banks are having their way with him to a sickening degree--It's better than it would have been if Phil Gramm was Treasury Secretary and McCain was President, but it still isn't the right way to deal with it. No one is standing up to these giant financial bullies. In fact, we wouldn't even have to ASK anyone to stand up to them if they played by their own rules and went belly up.
sixtyorso--These Ponzi schemes are popping up all over now. It sounds like between the Enron years and now it was just one big free for all stealing party in the financial world. What a mess.
Such a fun read. Economic nihilism. Unnovation. Priceless. Personally I think Wonga or whatever it is is just a symptom of the disease. Thanks for another great article!
Hi Tom,
Thanks! I agree. Wonga is just symptomatic of a problem that has permeated business models across the board--I don't know, something like, "Take the money and run," or as I often call it, "The United States of Who Gives a Sh*t".
Seriously, it's all thuggery and profit and bad service anymore. I will (and do!) pay more to work with a person, a single person, over any of these big companies--and I've heard other people say the same, but sadly lots of other people are all about price only. When companies compete on price alone eventually they aren't even selling anything--there' s no real product, no service. I'm so tired of that. Thanks for stopping by.
Perhaps the downfall of man is greed. The Dinosaurs needed an Asteroid! Maybe the 2012 doomsayers have a point?
bigguy434 says:
5 months ago
It kinda sounds like a micro-version of whats happening in Washington if you need it, get it, typically easy anything usually results in poor results. Ron Nichols