It's been a good year for Wonga. That's never a good sign

Record profits.

It’s just the kind of the thing you don’t want to hear. Reportedly, nine of UK’s 10 biggest payday lenders have seen their turnover double in the last three years. One has even recorded a 32-fold increase in profits since the start of the recession.

The worrying news comes days after payday giant Wonga reported record profits – a 36 per cent increase to £62m on a turnover of £309m in 2012. In fact, a year-long review by the Office of Fair Trading (OFT) has revealed that half of the payday lenders' revenues was the result of rolled over loans.

Every time there is optimism about the economy, news about how payday lenders are still very much thriving across the UK as well as the US, and only getting stronger, provides a reality check. Over the years, small and medium sized payday loan shops (many not so ‘small or medium sized’ any longer) have mushroomed (think Quick Quid, Better Credit, Ferratum…) and the demand keeps growing. Recently, there has also been much talk around adverting spends for payday loans increasing exponentially.

Wonga has predictably been criticised for profiting from the poor’s miseries and pushing the needy deeper into debt. However, Errol Damelin, Wonga’s founder and chief executive, has defended the firm’s profits saying most of Wonga’s customers are apparently “young, single, employed, digitally savvy and can pay us back on time”, and it’s not about “people on breadlines being desperate”. At this point, Wonga and the likes of it are in a strong place.

Recently Labour MP Stella Creasy said that money made in the payday lending industry comes at a heavy cost to Britain. Rightfully so. But clearly there is massive need for such quick money. Earlier in the year, research from uSwitch.com found that 49 per cent of those who took out a payday loan actually cited their experience as positive, contrary to popular perception, and one in three said they would even take one out again.

A few months ago Citizens Advice said high street banks should step up and provide short-term, micro-loans to fulfil demand for “these kinds of products”. But is it actually better when banks offer similar, predatory, expensive short-term loan products to customers?

Leading banks, particularly across the US, offer payday loan-like schemes that they vehemently defend as products aimed at stopping customers from going to dodgy small shops when in immediate need of cash. Top US lenders such as Wells Fargo (Direct Deposit Advance scheme), US Bank (Checking Account Advance loan), Regions Financial (Ready Advance loan product) to name a few offer short-term, sky-high interest loan products that almost mirror payday loans. 

Going back a couple of years, the Big Banks Payday Loans report, published by non-profit research and policy organisation, the Centre for Responsible Lending (CRL), in July 2011, revealed that bank payday loans carry an annual percentage rate (APR) of 365 per centbased on the typical loan term of 10 days. The average credit card interest rate, comparatively, in 2011, was just over 13 per cent annually, and the average personal loan from a commercial bank was 11.47 per cent. 

Through bank payday loan rates, consumers pay over $900 in interest to borrow approximately $500 for less than six months, the CRL report calculated. In general, an estimated 12m Americans are annually caught in long-term debt from such loans.

Banks, however, insist on the contrary. A spokesperson for Wells Fargo told me last year that the lender’s Direct Deposit Advance (DDA) loan scheme – a product that charges $1.50 for every $20 advance – is on offer because the lender “understands that financial emergencies come up and we want to be able to help customers with that”. Though she accepted that it is an “expensive form of credit” that is “not intended to solve longer term financial needs”, she also explained that “customers can extend or roll over the advance so it does not grow” and “there is never a mountain of debt that this customer is under”. Fair enough.

It is in ways safer for a customer to borrow from a familiar, popular bank as opposed to small, seedy loan sharks online or across the street.  But the question around whether or not these options should exist in the first place – especially be offered by financial institutions that people trust – is the bigger issue. One does wonder what kind of message that imparts, even though it may be the lesser of the evils.

Most welfare organisations are not convinced by banks’ “concerns” towards cash-strapped consumers. The federal agency primarily responsible for regulating consumer protection in the US, the Consumer Financial Protect Bureau (CFPB), began operations in July 2011, and has the power to write and enforce rules against predatory practices in payday lending. US’ National Consumer Law Center (NCLC), in fact, issued a statement to the Office of the Comptroller of the Currency (OCC) as well the CFPB back in August 2011 stressing that regulators put a stop to banks offering payday loans or similar products all together – but of no avail so far. Similar requests have come up time and again. Consumer groups have also complained that the OCC's guidelines are not “tough enough” and perhaps encourage more banks to offer such loans.

There are already several concerns surrounding UK banks’ most common overdraft schemes – including high cost, short-term balloon repayment, and consequent excessive use. Do customers need more ways to pile up bad debts? Considering the necessities, maybe it is time for banks to take a more customer centric approach and design new products that can be of immediate short-term help without leading disadvantaged clients into further financial agony. One can only hope.

Banks offering payday loan-like schemes do make them seem more approachable for customers who still think twice about walking into small shops for urgent money – the big-bank-backing may well make skeptical customers go ahead and do so – which is a bad sign. But there are enough people already reaching out to non-bank firms for money, which is a sign of grave need. There are doubts and dangers both ways, and unfortunately all one can say with certainty right now is that it’s been a good year for Wonga. That can never be a good sign.

Wonga Logo. Photograph: Getty Images

Meghna Mukerjee is a reporter at Retail Banker International

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BHS is Theresa May’s big chance to reform capitalism – she’d better take it

Almost everyone is disgusted by the tale of BHS. 

Back in 2013, Theresa May gave a speech that might yet prove significant. In it, she declared: “Believing in free markets doesn’t mean we believe that anything goes.”

Capitalism wasn’t perfect, she continued: 

“Where it’s manifestly failing, where it’s losing public support, where it’s not helping to provide opportunity for all, we have to reform it.”

Three years on and just days into her premiership, May has the chance to be a reformist, thanks to one hell of an example of failing capitalism – BHS. 

The report from the Work and Pensions select committee was damning. Philip Green, the business tycoon, bought BHS and took more out than he put in. In a difficult environment, and without new investment, it began to bleed money. Green’s prize became a liability, and by 2014 he was desperate to get rid of it. He found a willing buyer, Paul Sutton, but the buyer had previously been convicted of fraud. So he sold it to Sutton’s former driver instead, for a quid. Yes, you read that right. He sold it to a crook’s driver for a quid.

This might all sound like a ludicrous but entertaining deal, if it wasn’t for the thousands of hapless BHS workers involved. One year later, the business collapsed, along with their job prospects. Not only that, but Green’s lack of attention to the pension fund meant their dreams of a comfortable retirement were now in jeopardy. 

The report called BHS “the unacceptable face of capitalism”. It concluded: 

"The truth is that a large proportion of those who have got rich or richer off the back of BHS are to blame. Sir Philip Green, Dominic Chappell and their respective directors, advisers and hangers-on are all culpable. 

“The tragedy is that those who have lost out are the ordinary employees and pensioners.”

May appears to agree. Her spokeswoman told journalists the PM would “look carefully” at policies to tackle “corporate irresponsibility”. 

She should take the opportunity.

Attempts to reshape capitalism are almost always blunted in practice. Corporations can make threats of their own. Think of Google’s sweetheart tax deals, banks’ excessive pay. Each time politicians tried to clamp down, there were threats of moving overseas. If the economy weakens in response to Brexit, the power to call the shots should tip more towards these companies. 

But this time, there will be few defenders of the BHS approach.

Firstly, the report's revelations about corporate governance damage many well-known brands, which are tarnished by association. Financial services firms will be just as keen as the public to avoid another BHS. Simon Walker, director general of the Institute of Directors, said that the circumstances of the collapse of BHS were “a blight on the reputation of British business”.

Secondly, the pensions issue will not go away. Neglected by Green until it was too late, the £571m hole in the BHS pension finances is extreme. But Tom McPhail from pensions firm Hargreaves Lansdown has warned there are thousands of other defined benefit schemes struggling with deficits. In the light of BHS, May has an opportunity to take an otherwise dusty issue – protections for workplace pensions - and place it top of the agenda. 

Thirdly, the BHS scandal is wreathed in the kind of opaque company structures loathed by voters on the left and right alike. The report found the Green family used private, offshore companies to direct the flow of money away from BHS, which made it in turn hard to investigate. The report stated: “These arrangements were designed to reduce tax bills. They have also had the effect of reducing levels of corporate transparency.”

BHS may have failed as a company, but its demise has succeeded in uniting the left and right. Trade unionists want more protection for workers; City boys are worried about their reputation; patriots mourn the death of a proud British company. May has a mandate to clean up capitalism - she should seize it.