16 February 2011

Financial Times - Wonga raises £73m to feed loan appetite has raised another £73m ($117m) in equity funding to help feed the appetite among British consumers for its online short-term loans.

The London-based business has made more than a million loans in less than three years of trading, but it has also attracted criticism for encouraging people to take unsecured debt at rates of interest equivalent to about 3,000 per cent a year.

Errol Damelin, Wonga’s co-founder and chief executive, says annual rate comparisons such as APR (annual percentage rate) are misleading, because the maximum period a user can borrow money is 30 days.

He says Wonga’s rates are a fraction of those charged by high street banks for unsecured overdrafts and credit cards, which are the markets he is most interested in taking business from.

Wonga customers earn on average £22,000, “which is exactly the same as the national average wage”, Mr Damelin said. Wonga customers also have to have a bank account and access to the internet to use the service.

“Two-thirds of our customers are people who would otherwise use credit cards or overdrafts for short-term debt.

“For us it is about creating a real alternative [to these forms of credit] because people have lost so much faith in the banks.”

Wonga has prospered in part because the UK is one of the largest markets in the world for unsecured debt.

Short-term lending is also more lightly regulated in the UK than in the US, the largest market for these kinds of loans.

Mr Damelin says his business is providing a legitimate alternative to more unsavoury lenders.

Key to Wonga’s business model is its core credit-checking technology, which rejects two-thirds of applicants, according to Mr Damelin.

Ironically, given its service as a loan provider, Wonga has shunned debt finance as a way of building the considerable capital reserves needed to continue expanding.

“We never wanted to be a leveraged business like the banks,” Mr Damelin said.

“It is more about raising the money to have that battle chest there to create an alternative to the banks.”

The funding will also support some initial research into overseas expansion.

Wonga is looking at the US, Australia and Canada, although Mr Damelin insists such a move will not happen in the short term.

“We see an enormous scale of opportunities,” he said.

The latest cash injection was led by Oak Investment Partners, a US-based technology venture capital firm.

Meritech Capital Partners, another US-based VC firm, and Wellcome Trust, the UK’s largest charity and health-funding organisation, also invested.


Twitter Feed