Thursday, 11 October 2012

Willy Wonga & the money factory

Yesterday I was reading this story, which I think is kind of interesting. Apparently the fact that Wonga (a "high interest, short-term payday loan company") has signed a multi-million deal to sponsor Newcastle United FC has caused a massive controversy among MPs, campaigners and supporters alike. 

The reason for this controversy is that the way they (are allowed to) work is to give easy and very quick loans, at amazing (for them!) rates. This is probably an old, outdated advert, but the idea is that they proudly roll with an "unrepresentative" 2012% APR. 

Check to very light-grey, slightly less readable bit!

Luckily, I'm not one to be too impress by TV adverts (normally I am able to just shut my brains down when they are on), but the first time I saw it I thought they've missed a "." and the rate was actually 20.12% or something. In fact, it looks as though their typical APR is twice as much (4,214%)!

Yet, they claim that their customers are very happy with the service (quoting satisfaction rates of over 90% $-$ see here). The interesting thing is how they are perceived (market themselves?) as a "data-driven" company. Their decision making process is based on evaluating a set of individual characteristics (for example, as the article in The Economist reports, "having a mobile phone with a contract helps to get money"). I thought this was how any bank would operate, but apparently start ups like Wonga do it in a better(?), more comprehensive way, eg combining different sources of information. I wonder what kind of algorithms they really have underlying their decision processes... 

I suppose that the crucial point here is that with such high rates the expected value of information is really low; in other words, the uncertainty (risk) associated with each decision probably isn't really substantial (ie it does not have a real impact on the decision making process); because they lend small amounts of money, a customer defaulting is not too big a deal. But if the majority of customers can repay their debt (possibly lending more money), then they're (literally) golden... 

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