Thursday, 14 November 2013

Wonga - still not wronger

Tim Harford writes sensibly about Wonga here. I have just one caveat on what he says, but you  have to see his points first before I get to it.

Harford makes a number of good points. First, how times change:

"I believe it was December 1980 when my father sat down with me and warned me gravely that the central heating had broken down. It would cost money to repair, money that simply could not be summoned out of thin air. I should not count on getting the toy I wanted (a Lego Space Cruiser, in case you were wondering). I considered myself duly warned.

Such a conversation is hard to imagine today. Why empty such a big bag of sadness over the head of a seven-year-old Lego fanatic? Why not, instead, log on to and borrow a cheeky £150, just until payday at the end of December? Wonga would charge £27.99 interest, plus a £5.50 fee – is £33.49 really too big a price to pay for the happiness of a young boy?

I suspect that saying that that was responsible fathering makes one sound like a Dickensian villain. So be it. It was. There's no harm in learning that money cannot be summoned out of thin air.

Second, Wonga's critics are hysterical. They accuse Wonga of “grooming” children, for example. A financial services company is not a child abuser and it is just silly to suggest that it is.

Third, Wonga helps people. Yes, it does. As Harford says, "a payday loan can do real good, as a cash injection that helps avoid far more serious financial consequences, such as the loss of a job because the car broke down or penalty charges for failing to pay a bill on time. A randomised trial conducted in South Africa showed that this was not just a theoretical possibility. The experiment randomly approved or rejected applications for loans at an annual percentage rate of 200 per cent. Those who received one ended up better off than those rejected."

He goes on to write "One person uses a payday loan to buy the suit he needs for the job interview, and gets the job; another person uses a payday loan to buy lottery tickets. I know of no law that can allow one case and forbid the other. Transparency and fair dealing is no guarantee of happy outcomes."

My only caveat comes from Harford's pat conclusion: "Wonga did not create modern Britain; modern Britain created Wonga." He does not mean this in a good way. But in reality that modern Britain created Wonga is a good thing. Short-term high-interest loans to poor people have always existed and probably always will. As Harford points out, they can and do help people where banks cannot. Modern Britain has created Wonga in a good way: its regulations force Wonga to be open and transparent about its charges (have you ever seen a bus with bigger APRs on it than a Wonga advert?); its ease of doing business allows a new start-up to out-compete loan sharks safely and quickly; its infrastructure delivers money through mobile phones. These are all good things. They are all signs that modern Britain has taken small but real steps to mitigate the awfulness of poverty.

Harford's starting point is a good one. Wonga will probably mean that more children get more or better presents this Christmas than they otherwise would an perhaps more than in many respects they should. But that's not the worst thing in the world. It's certainly nothing like "grooming" children.

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