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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David Davis interview: The next Conservative leader will be someone nobody expects

The man David Cameron beat on why we should bet on a surprise candidate and what the PM needs to do after the referendum. 

“I’m tired,” says David Davis when I greet him. The former Conservative leadership candidate is running on three hours’ sleep after a Question Time appearance the night before. He is cheered, however, by the coverage of his exchange with Ed Miliband. “Which country would it be be like?” the former Labour leader asked of a post-EU UK. “The country we’re going to be like is Great Britain,” the pro-Brexit Davis retorted

The 67-year-old Haltemprice and Howden MP is at Hull University to debate constituency neighbour Alan Johnson, the head of the Labour In campaign. “As far as you can tell, it’s near to a dead heat,” Davis said of the referendum. “I think the run of events will favour Brexit but if I had to bet your salary, I wouldn’t bet mine, I’d place it on a very narrow victory for Brexit.”

Most economists differ only on how much harm a Leave vote would do. Does Davis believe withdrawal is justified even if it reduces growth? “Well, I think that’s a hypothetical question based on something that’s not going to happen ... One of the arguments for Brexit is that it will actually improve our longer-run economic position. In the short-run, I think Stuart Rose, the head of Remain, had a point when he said there would be very small challenges. In a few years probably nothing.

“The most immediate thing would likely be wage increases at the bottom end, which is very important. The people in my view who suffer from the immigration issue are those at the bottom of society, the working poor, which is why I bridle when people ‘oh, it’s a racist issue’. It’s not, it’s about people’s lives.”

More than a decade has passed since David Cameron defeated Davis by 68-32 in the 2005 Conservative leadership contest. The referendum has pitted the two men against each other once more. I asked Davis whether he agreed with the prime minister’s former strategist, Steve Hilton, that Cameron would be a Brexiter were he not in No.10.

“I think it might be true, I think it might be. When you are in that position you’re surrounded by lot of people: there’s the political establishment, the Whitehall establishment, the business establishment, most of who, in economic parlance, have a ‘sunk cost’ in the current set-up. If changes they stand to lose things rather than gain things, or that’s how they see it.

“Take big business. Big business typically gets markets on the continent, maybe distribution networks, supply networks. They’re going to think they’re all at risk and they’re not going to see the big opportunities that exist in terms of new markets in Brazil, new markets in China and so on, they’re naturally very small-C Conservative. Whitehall the same but for different reasons. If you’re a fast-track civil servant probably part of your career will be through the Commission or maybe the end of your career. Certainly in the Foreign Office. When I ran the European Union department in the Foreign Office, everybody wanted a job on the continent somewhere. They were all slanted that way. If all your advice comes from people like that, that’s what happens.”

Davis told me that he did not believe a vote to Leave would force Cameron’s resignation. “If it’s Brexit and he is sensible and appoints somebody who is clearly not in his little group but who is well-equipped to run the Brexit negotiations and has basically got a free hand, there’s an argument to say stability at home is an important part of making it work.”

He added: “I think in some senses the narrow Remain is more difficult for him than the narrow Brexit. You may get resentment. It’s hard to make a call about people’s emotional judgements under those circumstances.”

As a former leadership frontrunner, Davis avoids easy predictions about the coming contest. Indeed, he believes the victor will be a candidate few expect. “If it’s in a couple of years that’s quite a long time. The half life of people’s memories in this business ... The truth of the matter is, we almost certainly don’t know who the next Tory leader is. The old story I tell is nobody saw Thatcher coming a year in advance, nobody saw Major coming a year in advance, nobody saw Hague coming a year in advance, nobody saw Cameron coming a year in advance.

“Why should we know two years in advance who it’s going to be? The odds are that it’ll be a Brexiter but it’s not impossible the other way.”

Does Davis, like many of his colleagues, believe that Boris Johnson is having a bad war? “The polls say no, the polls say his standing has gone up. That being said, he’s had few scrapes but then Boris always has scrapes. One of the natures of Boris is that he’s a little bit teflon.”

He added: “One thing about Boris is that he attracts the cameras and he attracts the crowds ... What he says when the crowd gets there almost doesn’t matter.”

Of Johnson’s comparison of the EU to Hitler, he said: “Well, if you read it it’s not quite as stern as the headline. It’s always a hazardous thing to do in politics. I think the point he was trying to make is that there’s a long-running set of serial attempts to try and unify Europe not always by what you might term civilised methods. It would be perfectly possible for a German audience to turn that argument on its head and say isn’t it better whether we do it this way.”

Davis rejected the view that George Osborne’s leadership hopes were over (“it’s never all over”) but added: “Under modern turbulent conditions, with pressure for austerity and so on, the simple truth is being a chancellor is quite a chancy business ... The kindest thing for Dave to do to George would be to move him on and give him a bit of time away from the dangerous front.”

He suggested that it was wrong to assume the leadership contest would be viewed through the prism of the EU. “In two years’ time this may all be wholly irrelevant - and probably will be. We’ll be on to some other big subject. It’’ll be terrorism or foreign wars or a world financial crash, which I think is on the cards.”

One of those spoken of as a dark horse candidate is Dominic Raab, the pro-Brexit justice minister and Davis’s former chief of staff. “You know what, if I want to kill somebody’s chances the thing I would do is talk them up right now, so forgive me if I pass on that question,” Davis diplomatically replied. “The reason people come out at the last minute in these battles is that if you come out early you acquire enemies and rivals. Talking someone up today is not a friendly thing to do.” But Davis went on to note: “They’re a few out there: you’ve got Priti [Patel], you’ve got Andrea [Leadsom]”.

Since resigning as shadow home secretary in 2008 in order to fight a by-election over the issue of 42-day detention, Davis has earned renown as one of parliament’s most redoubtable defenders of civil liberties. He was also, as he proudly reminded me, one of just two Tory MPs to originally vote against tax credit cuts (a record of rebellion that also includes tuition fees, capital gains tax, child benefit cuts, House of Lords reform, boundary changes and Syria).

Davis warned that that any attempt to withdraw the UK from the European Convention on Human Rights would be defeated by himself and “a dozen” other Conservatives (a group known as the “Runnymede Tories” after the meadow where Magna Carta was sealed).

“They’ve promised to consult on it [a British Bill of Rights], rather than bring it back. The reason they did that is because it’s incredibly difficult. They’ve got a conundrum: if they make it non-compliant with the ECHR, it won’t last and some of us will vote against it.

“If they make it compliant with the ECHR it is in essence a rebranding exercise, it’s not really a change. I’d go along with that ... But the idea of a significant change is very difficult to pull off. Dominic Raab, who is working on this, is a very clever man. I would say that, wouldn’t I? But I think even his brain will be tested by finding the eye of the needle to go through.”

Davis is hopeful of winning a case before the European Court of Justice challenging the legality of the bulk retention of communications data. “It’s a court case, court cases have a random element to them. But I think we’ve got a very strong case. It was quite funny theatre when the ECJ met in Luxembourg, an individual vs. 15 governments, very symbolic. But I didn’t think any of the governments made good arguments. I’m lucky I had a very good QC. Our argument was pretty simple: if you have bulk data collected universally you’ve absolutely got to have an incredibly independent and tough authority confirming this. I would be surprised if the ECJ doesn’t find in my favour and that will have big implications for the IP [Investigatory Powers] bill.”

Davis launched the legal challenge in collaboration with Labour’s deputy leader Tom Watson. He has also campaigned alongside Jeremy Corbyn, last year travelling to Washington D.C. with him to campaign successfully for the release of Shaker Aamer, the final Briton to be held in Guantanamo Bay.

“I like Jeremy,” Davis told me, “but the long and the short of it is that not having been on the frontbench at all shows. I’m not even sure that Jeremy wanted to win the thing. He’s never been at the Despatch Box. He’s up against a PM who’s pretty good at it and who’s been there for quite a long time. He’s playing out of his division at the moment. Now, he may get better. But he’s also got an incredibly schismatic party behind him, nearly all of his own MPs didn’t vote for him. We had a situation a bit like that with Iain Duncan Smith. Because we’re a party given to regicide he didn’t survive it. Because the Labour Party’s not so given to regicide and because he’d be re-elected under the system he can survive it.”

At the close of our conversation, I returned to the subject of the EU, asking Davis what Cameron needed to do to pacify his opponents in the event of a narrow Remain vote.

“He probably needs to open the government up a bit, bring in more people. He can’t take a vengeful attitude, it’s got to be a heal and mend process and that may involve bringing in some of the Brexiters into the system and perhaps recognising that, if it’s a very narrow outcome, half of the population are worried about our status. If I was his policy adviser I’d say it’s time to go back and have another go at reform.”

Davis believes that the UK should demand a “permanent opt-out” from EU laws “both because occasionally we’ll use it but also because it will make the [European] Commission more sensitive to the interests of individual member states. That’s the fundamental constitutional issue that I would go for.”

He ended with some rare praise for the man who denied him the crown.

“The thing about David Cameron, one of the great virtues of his premiership, is that he faces up to problems and deals with them. Sometimes he gets teased for doing too many U-turns - but that does at least indicate that he’s listening.”

George Eaton is political editor of the New Statesman.