The demand for instant results is seeping into every corner of our lives. What’s more, our expectation of ‘instant’ has become faster too.
But banking is notoriously slow to adapt. It wasn’t until 1999 that the Co-operative Bank launched Smile, the first fully online banking service – that’s 15 years after the first Internet shopper made a purchase!
If you’re a generation X, you’ll probably recall making an appointment to ask for a loan at some point. Banks insisted on meeting eye to eye so that staff could interrogate you about your financial position, as well as caress and photocopy your physical documentation.
As we crossed over into the 21st century, the very idea of instant loans seemed like a not so instant dream.
The road to Instant loans
With a lack of momentum from the banks, it fell to Internet entrepreneur Errol Damelin to break new ground.
In 2006, Damelin came up with an idea for a modern, customer-centric approach to lending.
His goal would be to provide customers with transparency, exact control of amount and payment date, and instant access to funds with no faxing or emailing documents.
After a year of software development, Damelin launched Wonga.com in beta version, where customers could apply for short-term loans up to £400.
From the outset Wonga customers were able to complete their loan application entirely online; they could select the exact amount they wanted in £1 increments and choose their own repayment term from 1 to 35 days.
However, there was still one piece of the jigsaw missing. Although Wonga’s risk assessment technology enabled them to make real-time lending decisions, it still required the co-operation of banks to get funds to customer’s bank accounts, which at the time was a not so immediate 3 working days.
In 2008, Damelin’s goal to provide immediate access to funds was finally realised when Faster Payments (Britain’s first new payment service in 20 years) launched, making it possible for payments to be processed almost instantly.
UK Payday industry growth and expansion
Damelin’s model for fast, fuss-free loans was successful, turning Wonga into the UK’s largest payday loans provider.
The UK payday market continued to grow rapidly, reaching a peak in 2013, when 1.6 million customers took out 10 million loans with a value of £2.5 billion. Approximately 400 direct lenders were reported to be operating at the time.
The explosion in new payday loan companies, gave rise to another group of tech savvy firms, such as Instant Lolly. Their technology provides prospective borrowers with a further layer of convenience — by giving them access to numerous lenders through a single application form.
Hold on cowboy, there’s a new sheriff in town!
The Financial Conduct Authority (FCA) took over responsibility for consumer credit in April 2014. One of the new measures it introduced was a price cap on high-cost short-term credit (HCSTC), which came into effect at the start of 2015. The FCA defines short-term credit as ‘credit that is provided for a period up to a maximum of 12 months’, which includes payday loans and short-term loans.
The FCA’s measures inevitably led to some payday lenders shutting up shop. Others were forced to rethink business models to ensure they remained viable under the new regime.
Most lenders operating today, have since moved from offering payday loans to short-term loans. Short-term loans are like payday loans, but they offer a greater degree of flexibility; they enable borrowers to spread the cost over multiple instalments instead of a single lump sum.
Ironically, Wonga was last to update their portfolio, only introducing their 3 month ‘Flexi Loan’ in 2016.
A final word
Whenever a product or service provides more convenience, there’s usually a price to pay. In the case of Damelin’s ‘instant loans’, it’s higher interest rates. However, if you do find yourself in need of cash in a hurry, it’s another option to consider.
The absolute final word
As we all now know, Damelin’s Wonga famously collapsed into administration in August 2018.