In 2009, Sarah Lacy, then a writer for TechCrunch, set the gold standard for startup hype in a write-up about Wonga, a payday loan company that just might "upend the world's financial institutions." Today, Wonga is about as hated as Wall Street and was just forced to write down £220m of debts for 330,000 customers because the loans were unethical.
The company is based in London, but the list of venture capitalists who invested $145.4 million over the years includes Silicon Valley stalwarts like Accel Partners and Greylock. Wonga's other investors are prominent in Europe. Local reports of its implosion have been relatively mild, but Wonga's misdeeds are pretty spectacular.
In May, Wonga's CEO stepped down after a scant six months on the job. In July, Andy Haste as chairman, hoping his "blue chip financial credentials" might be able to make people forget that the company sent out fake legal letters to scare borrowers who had trouble paying back their loans:
The UK's biggest payday lender has been without a permanent chief executive or chairman since its co-founder Errol Damelin quit as chairman in June last month. Damelin's departure, seven months after he stood down as chief executive, came just before the financial regulator ordered the payday lender to pay £2.6m in compensation for misleading customers by issuing letters to struggling borrowers under the name of fake legal firms.
The Financial Conduct Authority said Wonga had been guilty of "unfair and misleading debt collection practices" after it emerged the lender had made up the companies to threaten legal action against customers.
The Law Society has called for a criminal investigation but Haste said Wonga had not been contacted by police. "As of today we are not under criminal investigation and our whole focus is working with our regulator to pay compensation to customers in a timely manner."
The company, which has faced criticism for its high interest rates and debt collection tactics, made the changes after discussions with regulators.
Customers in arrears whose loans would not have been made under the new checks will have their debts written off.
A further 45,000 customers in arrears will not have to pay interest on loans.
The BBC said Wonga lends money to roughly a million customers a year. In July, Haste promised to enforce stricter criteria. The process sounds corrupt from start to fake letter finish. Take this example from a 20-year-old customer named Elliott Gomme who easily gamed the system to get £120 to go on vacation by claiming that he worked full-time:
"My bank couldn't give me an overdraft or anything, and so I went to [Wonga]," he says.
He received his money and went on holiday, but a few weeks later he says the firm started calling him and he says they were "constant".
"They were ringing me every day," he says. "They were telling me how much I owe and that there was added interest."
Elliot says that a few months later he was being told his debt had risen to more then £800 and it began to affect his day-to-day life.
Reporters are no better than investors at picking which startups will succeed. We've all made wrong calls. But what's so strange about TechCrunch's post from 2009 is that Wonga was already controversial, a fact Lacy noted and dismissed:
Critics have said that Wonga is usurious by charging a 1% interest fee per day. But that's a knee-jerk response. [...]
Sure, you can say Wonga is dangerous because it's giving people an easier way to live outside their means. But that's a bit like arguing giving kids condoms encourages teenage sex. You can't change human behavior, but you can help make people safer.
Now here's the downside on Wonga: It's only available in the UK . . .
Tech bloggers must be humans because you can't change their behavior either.
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[Image via Associated Press]