Report on

8 August 2016

The overall purpose of this report is to examine whether Wonga has a promising future and to access, and provide a recommendation as to whether it is worth investing in. This is examined in light of the company’s background, key product and operations, financial statistics, a SWOT analysis, ethics and it’s future targets. Wonga is a british payday loan company which offers, short term high interest loans to individuals online, and within minutes using an algorithm that analyses thousands of pieces of information in seconds.

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Since its launch it has also added a service where customers can distribute the cost of items bought online over three monthly installments in return for an upfront payment. Through its operations Wonga’s retained profits are equivalent to approximately 5 pence on every pound it is lending. It lent ? 1. 16 billion in the UK last year; up with the number loans granted standing at 3. 8 million in the UK, currently Wonga caters to more than one million people in the UK. Wonga remain committed strengthening their balance sheet. In 2012, they ended with a gross cash of 105 million, which is more than doubled the previous year. However, the cost of sales operating the company relatively increased, nearly ? 140 million, 86% higher than 2011. Wonga’s massive profit margins and average 5853% APR has been surrounded by much criticism from the church of England which threatens to aid credit unions to compete the firm out of business. Furthermore the company has also been widely criticized in the media for its marketing campaign which was targeted at the teenage crowd. But despite all the controversy this company continues to strive and have set their sights on global expansion.

The firm is already present in Canada, South Africa and Poland, and through its acquisitions of Nahar Credit, Credito Pocket, and BillPay the company is looking to expand into India, Spain and Germany. From an overall examination of the company, an investment in Wonga could prove to be profitable especially in the long term. This company has differentiated itself from others in their new market by being able to examine a client and provide a loan within fifteen minutes. The simplicity of their service is attracting more customers every day, even with the steady increase in interest rates. They have persuaded millions of customers to trust and continue using the service, despite the bad publicity associated with the company. The companies future targets, and its international investments have aided its goals for globalization. Their plans show promising results, which makes the company much more attractive to investors. Therefore, Wonga is an innovative and reliable company to invest in, especially for the long term. 2 COMPANY INFORMATION 2. 1 Background Errol Damelin and Jonty Hurwitz established SomeDayCash in October 2006.

Neither of the founders had any past experience in retail banking, but they both had some key entrepreneurial skills. They had a lot of difficulty convincing investors as everyone thought of the short term-loans business to be too risky and unprofitable. Banks weren’t keen on the idea of a fully automated loan, not having any human approval of the transactions taking place. Once the beta website of SomeDayCash. com was launched in 2006, within 5 minutes the first loan application was processed and within a week the first loan default occurred.

That then became a sequence through a couple of weeks, for every successful loan, came a defaulter. Throughout the next couple of months the number of customers was slowly rising. SomeDayCash experienced default rates of around 50% as the traditional credit risk assessment proved to be inadequate. During that time, the company was gathering data about every customer they had; their online profile, repayment time and so on, which was used and put into an algorithm. The official market launch of Wonga. com was in July 2008 and it quickly developed as one of the most innovative credit providers all over the world.

Wonga was number one company in the Sunday Times Tech Track 100, which lead to the fastest improvement of all technology companies in the UK as it reached a figure of 100,000 loans in just under a year of operation. (Shaw 2011) 2. 2 Key Product Wonga’s mission is to deal with occasional and short-term cash flow demands for individuals and businesses, with equally short term solutions by using automated and real-time risk technology to process a wide number of requests. Therefore, the company can make instant decisions for lending in seconds at anytime the customers require.

The loans available by the website vary from ? 1 to ? 400 and the payback period of 1 to 38 days. Although Wonga can approve loans through paying into bank account in a few minutes, the company are highly selective about the customers who they believe can repay quickly. This means there are about two-third of first time applicants are declined. However, Wonga have provided millions of loans via the website and smart phones which helps the company to achieve industry-leading low arrear rates and world-class customer satisfaction.

“Whilst there is not much difference in terms of costs between Boodle and Wonga, we feel that Wonga is just slightly ahead in terms of optimising their user experience, as well as communicating the product in a professional yet easy-to-follow manner which makes Wonga the best payday company in South Africa. ”(payadayloans. top10reviews) 2. 3 Company operations As the company’s service is operated in a flexible and simple way, Wonga became an advantage competitor to the old world of high street banking and traditional lenders along with QuickQuid, Pay Day UK, Dosh Express and Wage Day Advance.

To become more competitive, one of their main goals became international expansion. Wonga’s services are now provided in the UK, Poland, Canada, Spain and South Africa. Because of Wonga’s new strategies in online finance services, the company can gain many competitive advantages and make differences in the finance market of the world. The first advantage is providing financial services fast and simple without the long queue of waiting, complex documents and rigidity. Thus, the company becomes a great choice for people and small businesses that need to borrow some cash quickly.

The next difference is the company using online technique to deal with customers’ requests. As a result, customers do not need to make a meeting with bank officers or contact with banks via phones because all the services are processed via online website or smartphone. The other competitive advantage is creating a friendly environment for customers’ choices. Customers may feel more comfortable to choose how much cash they want to borrow and how long they want to pay money back to the firm. Therefore, customers can save a lot of money when paying interest anytime they want that can be a few days or weeks.

This is really a big advantage the company brings to customer when traditional finance providers require a fix-interest paying in a long time. Wonga therefore differentiates itself from banks and other payday loan providers. 3 FINANCIAL STATISTICS Wonga’s retained profits are equivalent to approximately 5 pence on every pound it is lending. It lent ? 1. 16 billion in the UK last year; up with the number loans granted standing at 3. 8 million in the UK. Its UK customers grew to just nearly 1 million in the year 2012. (Quinn J. , 3rd September 2013) Primarily charging interests on short-term loans generates Wonga’s revenue.

This turnover is recorded when customers fully pay back their interests in addition to their original loan amount borrowed. The companies’ 2012 full year pre-tax turnover was approximately ? 309 million. Wonga expanded by introducing small commercial loans for business last year. The company also launched a product for the online retail payments market, which explains an increase of 67. 5% in revenue, compared to the year 2011, ? 184 million. Wonga remain committed strengthening their balance sheet. In 2012, they ended with a gross cash of ? 105 million, which is more than doubled the previous year.

However, the cost of sales operating the company relatively increased, nearly ? 140 million, 86% higher than 2011. The cost of sales of a credit provider includes costs related to the development of technology and system, administration, land rent, advertising, salaries for managers and employees. One of the reasons for the significant increase of cost was a rise in number of employees. There were only 131 staff in 2011; the salaries amounted to just above ? 8 million. Because of the company’s expansion, they recruited 191 more employees, so the salary cost increased to  22. 5 million. This leads to a Gross Profit of about ? 169 million in 2012, a 55% improvement. Although the company’s profit boosted, this is an adverse improvement as its cost increased by 86%, more rapidly than the profit. After deducting investment income from other earning sources, the company itself only generated an operating profit of ? 84 million to about ? 63. 5 million in 2011. Therefore, it could be concluded that most of the increased profits were generated from outside investment rather than profit the company were earning.

Moreover, taxes need to be considered as well, as the rate of taxes may change in years. In 2012 and 2011, the profit post tax was ?62. 6 million and ? 45. 8 million, respectively. As can be seen from the table above, in terms of ledger figures, the company owns ? 224. 5 million worth of assets in the year 2012. This amount was increased by 60% in a one-year period. Yet liabilities were increased by 90%, reaching the highest amount ever, ? 36. 8 million. It is only amounted of about 16% of the total assets of the Wonga.

Chairman of the Wonga Board Robin Klein, quoted “Wonga’s profitability during 2012 was the result of the large scale of our operations and an unflinching commitment to provide a flexible and convenient service designed around customers. ” The total number of funded money by shareholders was over ? 187 million in 2012. It can be seen that, in one year Wonga managed to attract ? 66. 7 million more, which shows an overall good potential for investment. There are no official statistics on the payday-lending sector in the UK but clearly it has grown significantly since 2008, when we estimated it to be worth around ? 900 million. Consumer Focus estimated the total value of loans in 2009 at ? 1. 2 billion, 23. 2 As the sector continues to grow, responding to increasing demand, we are seeing very different reports on who takes the loans, why and the impact on them. while more recent media reports have suggested it is in the range ? 1. 7 to ? 1. 9 billion. (Damelin E. , 2013) 4 SWOT ANALYSIS 4. 1 Strengths Wonga’s main strength is the simplicity of its service to customers. The basic method of taking a loan online with just a few simple steps has attracted and kept customers to use Wonga.

Additionally, as wonga increases trust in customers returning loans, the budget to take a loan for those customers increases, ensuring that the company and the customers are in control of their finances. The effectiveness of Wonga’s advertisements and marketing strategy has increased their brand loyalty which in return plays a major role in the company’s success. 4. 2 Weaknesses Wonga’s main weakness is that the loans are based on a simple algorithm which proved to be very unpopular when trying to get finance from investors.

This means that there is no face to face interaction between the borrower and the lender which is very risky for the company and unpopular among banks. As Wonga expands into developed countries where the wage rates are high, labour costs are slowly increasing which has a negative effect on the net profit margin. 4. 3 Opportunities Due to the rapid growth of the pay day loan market, Wonga is experiencing an increase in demand resulting in a larger consumer base which not only increases revenue but also raises the barriers to entry into this market.

As Wonga is one of the only companies in the pay day loan market looking to expand internationally, its strategy to target the growing middle class in developing countries could prove to be effective as these countries face a market gap in the corporate payday loan sector. 4. 4 Threats Another effect of the rapid growth in their market is an increase in competition, this means that the increasing demand for the product is attracting entrepreneurs to set up in this market.

As they are new private companies there is no financial data released to the public making it difficult for Wonga to compare. Wonga has drastically increased their annual percentage rate which in the long run could decrease their number of customers, especially if it continues growing past what people can afford. Wonga has also been heavily criticised for their marketing strategy which aims to entice a younger audience threatening the company’s ethics in advertising and their customer targets. 5 ETHICS Corporate social responsibility is the way a company manages all aspects of its business in order to make a positive effect on all the stakeholders and their environment. The initiative is for a company like Wonga to take responsibility for its impact on the environment and social welfare. A lot of controversy has risen regarding Wonga’s advertising strategy of leading people into borrowing money on a normal basis if their monthly income is not enough(Poulter. S,2013).

Because this leads to borrowers increasing their personal debts, debates have been brought up questioning Wonga’s ethical concerns towards its customers. While the payday loan industry claims that children are not part of their target market, Wonga’s advertisement including adorable puppets and catchy tunes seeks to captivate children(Poulter. S,2013). However, a research conducted shows that one in seven adults are asked by their child to take out a loan to purchase something for them and 70% of under 16 year olds have seen advertisements from payday loan(Poulter. S,2013). Wonga has also sent letters to children offering them a loan, which they may not be able to repay due to the high interest rate (Winch J. 2013). This shows that Wonga is encouraging children to start borrowing money at a very young age. Although Wonga claim that they are responsible lenders and reject 80% of first time lenders, debt charities and advice organisations state that the number of people who have approached them with payday loan problems have been on the rise for the last two years.

Wonga. com, is planning rapid expansion around the world after dominating the short term loan market in the UK. The company is looking to enter countries that have a favourable regulatory environment, large numbers of internet users, and where reliable sources of data are available. Since its launch, the company has already expanded into South Africa and Canada, where its business is fully operational.

The South African and Canadian branches of the company operate on exactly the same system as the UK, loans for new customers are smaller and extend to a maximum of 30 days. After its success in these two countries, the online lender is now eying a number of markets around the world, looking to invest in both developed countries and developing nations. Niall Wass, chief operating officer, said that “What we’re anxious to do is make sure we can replicate that growth rate in other territories and replicate it with other digital finance products,”(Cookson, Moore 2013).

Wonga has no debt, and claims that it has sufficient financial means to make acquisitions around the world; It is now actively looking to further expand in India, Spain, USA and Germany. 6. 1 India Expansion into India is Wonga’s first investment in the developing world. Wonga has bought a 75% stake in Nahar Credits Private for 3. 2 million pounds. Although the deal may seem small in financial terms, it is a significant step for the company as it now has access to the Indian market.

Nahar Credits was mainly focused on giving commercial loans to small companies, but its existing license permits lending to individuals, which will allow Wonga to enter the market gap created by a growing middle class in need of convenient, short-term loans. Details of this acquisition were filed in the companies annual accounts, and in the document Wonga stated “The acquired company is authorised as a financial services company in India and will give the group the opportunity to commence operations in India. ” (Quinn 2013) 6.2 Germany Wonga made further progress on its quest for global expansion with its acquisition of German payment firm BillPay. BillPay lets people make payments for items purchased online with a range of different methods such as installment credit. Wonga has a similar service in its company, where it allows customers to distribute the cost of items up to a thousand pounds over three monthly installments in return for an upfront payment, but this service remains unpopular as only twenty retailers have agreed on the service so far.

Wonga’s purchase of BillPay will help expand this service and progress its goals for expansion. Wonga’s chief executive, Errol Damelin, said: “The combined Wonga and BillPay business will consolidate our position as a pioneer in the financial revolution… as well as giving Wonga a presence in Europe’s second largest online retail market, this deal continues our ongoing transformation into a fully international, digital finance business with operations across three continents and more than 3 million customers. ” (Osborne) 6. 3 Spain

Wonga is using a similar strategy to penetrate the Spanish market as it did in Germany. In Spain Wonga bought pay day lender Credito Pocket to make its first appearance in the country. Overtime it re branded the website under the Wonga name and now the Spanish branch of Wonga is fully operational as well. Spain was a great opportunity for a company like Wonga as the economy is down, and unemployment rates are soaring, Wonga saw the need for short-term loans in the country and grabbed the opportunity by buying up the other major short-term loan provider around. is expanding rapidly around the world, it has successfully started to transition its business into all of Europe and the companies services will soon be available in developing countries in Asia and Africa. All these areas are great for business for a short-term loan company like as they accomplish Wonga’s goal of expanding into territories, which have lots of internet users and few strict regulations on short-term loans. 7CONCLUSION AND RECOMMENDATION To conclude the full research done of the company, it is evident that Wonga is in a financially stable position and shows promising signs of growth.

The companies’ 2012 full year pre-tax turnover was approximately ? 309 million, a 67. 5% increase from the previous year. Despite some controversial criticism of Wonga’s high interest rates, debt collection issues and misleading advertising strategies to attract teenagers, it still proves to develop high recommendation and reliability from its users among other short-term loan competitors. Wonga has also shown great interest in global expansion, it has already made its brand available in several European countries, South Africa and Canada.

Wonga also has future plans to move into developing countries such as India. From an overall examination of the company, an investment in Wonga could prove to be a profitable investment especially in the long term. Wonga differentiated itself from other payday loan provider by using a fully automated system, which can examine a person and process their loan in minutes. The simplicity of their websites helps make the service easy and hassle free, the company is able to attract more customers every day, despite its skyrocketing interest rates.

They have persuaded millions of customers to trust and continue using the service, despite the bad publicity associated with the company. The companies future targets, and its international investments have aided its goals for globalization. Their plans show promising results, which makes the company much more attractive to investors. Wonga is also increasing its services from just short term loans to allowing people to pay for online purchases in installments. Furthermore, the payday loan market is still in its early stages which gives Wonga,one of the market dominator, countless opportunities to grow and improve.

Lastly one can see from the company’s financial statistics that Wonga is doubling its revenue and profit every year, it was launched only in 2008 and in just five years it has accumulated more than a million customers. Wonga is an innovative and reliable company, it has immense potential and a lot of room to grow as the payday lending market is still young. Their plans for increasing their line of services as well as for global expansion and market domination show bright prospects. Investing in this company could prove to be highly profitable, especially in the long term.

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