By now you'll have seen Mike Butcher's piece on TechCrunch about the results of last month's Startup100 awards. Wonga was voted the winner, but at the last minute Spotify was jobbed in to win the prize. So far so nefarious, but the worst bit is that the vote was only rigged because some of the people running the award are apparently too stupid to understand the benefits of short-term lending so don't want to be associated with it.
The folly of rigging your own awards ceremony has been sufficiently addressed by Mike (and it is telling that the Telegraph's reponse to this is basically to wash their hands of the whole affair, little more than "a big boy did it and ran away"). It is the apparent misapprehension of the organisers that Wonga is doing something disreputable that I wish to address, by looking at the basic economics of short-term lending and the small amount of research that has been done on this market.
This knee-jerk reaction is, as so often the case, simply wrong. There is limited research as to the impact of short-term lending on the people who avail themselves of it, but what research has been done found the effects to be positive.
Dean Karlan, a microfinance economist at Yale, and Jonathan Zimmerman of Dartmouth College, studied the impact of short-term, high-interest loans to the poor in one market - South Africa. A detailed summary of the findings are here (thanks Tim) but briefly Karlan and Zimmerman found that the customers of the short-term loans company they studied, offering loans at APRs around 200%, "were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge."
Karlan commented on his experiment, "We expected to see some good effects and some bad...But we basically only saw good effects." Tim concludes that, "these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn’t a wise investment?"
This is one experiment. South Africa is not London. All true, but when we are short of hard evidence it seems perverse to draw the opposite conclusion from what little data there are.
Wonga's 3000% APR sounds, superficially, like a very big and alarming number. Exploiting the poor in their hour of need sounds, superficially, like an easy thing to object to. If anyone was daft enough to try and borrow £100 for a year at that rate then they should be discouraged, or at least pointed to a more appropriate lender.
But as it happens it is not possible to do anything of the sort - Wonga lends money on a very short term basis, a few days or a few weeks at most. Over a week borrowing a hundred quid at the scary headline APR of thousands of per cent works out at about a tenner on top. Over a month it's thirty quid. Try going into unauthorised overdraft with your bank for a week, which really does make its money by hoping you'll screw this sort of thing up, and see if you can get such generous terms. Try it with a loan shark (often, in reality, the alternative).
Wonga is disreputable only to those who don't trust the poor to make sensible decisions about their own finances. According to the only research we have, the poor are able to make those decisions perfectly well. So rigging an award ceremony so as to avoid an association with Wonga is foolish and wrong on not one level but two, and while the Telegraph gracelessly passes the buck for the decision the real issue is whether they will admit that actually Wonga is a good and socially useful idea.