Wonga’s profits wonky after fake collection agency letters

High flying payday lender Wonga released its annual profit figures today. A 53% drop in profits shows just how damaging a scandal was to the bottom line.

Profits were £84.5 million in 2012. Analysts expected profits to drop to around £50 million for 2013 due to the backlash of a fake letter practice that harmed the firm’s reputation. The actual figures were even lower, with profits rounding out at £39.7 million.

The scandal

The uproar in collection strategies stemmed from Wonga’s distribution of fake law firm letters to customers who defaulted on its loans. Since the loans are essentially unaffordable, this included a huge percentage (45,000) of its customers.

The most egregious aspect of the fake letters is that the company admittedly used the made up names of law firms. This insinuated to debtors that they could expect legal troubles as a result of defaulting on the loans.

The cost

Wonga set aside £18.8 million to cover costs related to the fake legal letters. The company had to pay £2.6 million in fines to the Financial Conduct Authority.

Since loan volumes actually increased 15% and defaults dropped slightly, the real impact is on the company’s reputation. This is something that Wonga is doing something about.

Puppet advertisements that have been maligned by consumer watchdogs have been replaced with more socially responsible ads. Of course the 5,853% APR still remains, which is anything but socially responsible. The loans do little more than speed up the demise of families on the brink of financial ruin.

Despite the criticisms, Wonga’s lending practices are completely legal (minus the fake law firm notices). The firm is charging excessive fees just like the rest of the industry.

There really are only a couple of things that can change that reality. First, the government would need to act to cap interest rates. Several proposals seek a cap at 100% annual interest. The other need would be cheaper alternatives.

Credit unions already represent a cheaper alternative, yet few citizens seek out these loans when they are in need. Credit unions do not compete through the same advertising mediums, so many debtors simply are unaware that there is a better way.