FEATURE: Cashing in on the poor
By Rebecca Burn-Callander Wednesday, 31 October 2012
A swathe of businesses like Wonga are deliberately targeting Britain's poor. Are they being helpful or exploitative?
Payday loans. Door-to-door lending. Rent to own. Penny auctions. Pound shops. Think that the credit crunch has been bad for business? Not for these recession-resistant few. Over the past four years, nourished by the downturn, accelerated by leaps in technology, firms in these sectors have provided quick cash or goods to those who couldn't secure credit from traditional sources. The poverty business is booming.
Brits are getting poorer every day. Real pay - the amount we earn adjusted for inflation - hasn't just dipped, it's fallen faster than a lead balloon. A report compiled by the Institute of Fiscal Studies (IFS) into average incomes shows that last year alone, mean household income fell by 5.7%, from £542 per week to £511. That's the largest one-year fall in income since records began at the start of the 1960s.
The Department for Work and Pensions has a catchy euphemism for the growing numbers of people living on or beneath the poverty line: Households Below Average Income (HBAI) - households earning less than 60% of the national average. Last year, 15% of the UK population - 9.1 million of us - fell into the HBAI bracket. That's equivalent to the population of Sweden.
For businesses looking for customer volumes, targeting these hand-to-mouthers is a canny strategy. It's a chunky demographic that's still growing: forecasts by socio-economists at the IFS predict that the great British household will be even worse off by 2015. This, alongside the ongoing eurozone turmoil, contributes to a Dickensian picture of national poverty.
It is against this backdrop of financial gloom that a few businesses are shining brightly. When MT heads to Watford Junction to meet Leo McKee, the CEO of rent-to-own business Brighthouse, the bright orange branding glows against the grey London sky. 'Our stores look like a beacon,' says McKee, gesticulating wildly like a TV magician. 'Our shop windows are bright and inviting. It's not everywhere that individuals on low incomes get treated with respect but they get treated like platinum customers at our stores.'
Brighthouse is the quintessential recession-beater: hire purchase for the smartphone generation. Firms of its ilk operate on the rent-to-own model, selling everything from sofas to clothes to TVs. Take a 60-inch Sharp telly home today and pay £25.29 (including cover) each week for 156 weeks - the perfect solution for a consumerist yet cash-strapped society.
Of course, this comes at a price. A cost of £3,430.44 for a TV with a cash value of £1,548.54, to be precise. Brighthouse charges 29.9% APR over periods ranging from 52 to 156 weeks - and that's still not where it makes its real money. 'Extras' that let you return products or defer payments in cases of financial difficulty really bring home the bacon, explains McKee. The problem for the customer, of course, is that with deferred payments the interest piles on extra pounds.
Still, when you are getting your paws on your heart's desire right now - everyone these days wants everything right now - and Brighthouse is assuming all the risk, is it not right and fair that you pay a bit extra?
Not this much extra, says online shoppers rights forum Consumer Wiki, which has calculated that a Brighthouse insurance policy can end up costing you £250 on an £800 cash price product. Even McKee himself hints that there's something a little whiffy about all the additional charges when he says that 'only' around 87% of customers take out optional cover. 'That tells you it's optional,' he insists. 'If I said 99.2% take-up then it wouldn't be optional, would it? And if I was to see a store, week in, week out, with 100% take-up of optional service cover, the staff are immediately questioned. Same with average revenue per customer,' he adds. 'If that goes up too high, they get questioned.'
Despite McKee's best attempts to keep per customer revenue at equitable levels, the firm is going gangbusters. He's opened 35 new stores this year, taking Brighthouse to a total of 265 outlets nationwide. McKee dismisses this growth as conservative, however. 'If I opened another 200 stores tomorrow there would easily be demand,' he says.
Even the blue-chips are catching on to the collective buying power of the poverty economy. Big companies such as Unilever are zoning in on this market, manufacturing single-serve sachets of washing powder or body wash for those who can't afford the whole box. It's a model adapted from emerging markets such as India, where 68.7% of the population live on less than $2 a day. After all, a small share of a household's limited budget is better than no share at all.
There's more to the explosion of the poverty economy than a critical mass of HBAI, however. Technology has been a huge enabler. Less than a decade ago, the only way to get a loan was to barter with your bank manager or host a home visit by dodgy Uncle Vinnie, the loan shark. These days, credit decisions can be made in an instant over the web. The borrower doesn't even have to fill out any forms: the calculations are made using the gigabytes of financial data stored about us online (or using no credit checks at all). And no one even has to know about it - borrowing money has become anonymised by the rise of the internet.
Controversial payday lender Wonga could not have existed 10 years ago. But, today, loans can be taken out via its jolly website quickly, easily and without shame. Wonga charges 4,214% APR on its loans - a figure that is emblazoned clearly on its home page, alongside the trademark slider, which shows you exactly how much you have to pay back over a period of up to 30 days.
In business terms, Wonga is a runaway success: profits rocketed 269% to almost £46m last year and a flotation is in the offing. But it is in the headlines for all the wrong reasons, even turning up in the Beeb's Panorama investigation into payday lenders last month. Wonga has drawn the ire of consumer rights groups, politicians and football fans alike. Newcastle United supporters are against Wonga's new four-year, £32m sponsorship of their club. Not only is money-lending against Sharia law - a key concern when your star players are devout Muslims - but Newcastle just happens to be the unemployment capital of the north-east. Labour MP Stella Creasy, who calls the outfit a 'legal loan shark', has just launched her own 'Sharkstoppers' campaign to try to curtail the growth of high interest lenders by capping the cost of credit.
The statistics are indeed alarming: a third of borrowers take out payday loans to pay off other payday loans; 60% of people use loans to pay bills or buy essentials like food, nappies or petrol; 46% of UK payday customers have an income of less than £15,500 a year; one in eight workers take out regular payday loans, costing them three days' wages.
On average, 'Wongees' use Wonga about three or four times a year and borrow just a quarter of the credit available to them for half the time they could have it. Founder and CEO Errol Damelin certainly doesn't wish to seem like a modern-day Uncle Vinnie. 'We allow and encourage fee-free early repayment at any time,' he says. 'Nearly 25% of customers take advantage every month. We don't encourage rollovers and we cap interest at 60 days.'
Wonga is so inundated with customers - over a million people have taken out loans since the firm's inception in 2006 - that it doesn't have to lend money to people that are classified as high risk: the poorest of the poor. 'We decline around two-thirds of first-time applications and our arrears rates are comfortably in single digits, percentage-wise,' says Damelin. 'It's not the profile of a vulnerable customer.'
Not all the players in this market are so transparent about their fees and processes, however. And there are a lot to choose from (see panel below). There are also the growing ranks of doorstep lenders - companies that flog you loans while you're sitting at home, minding your own business. The BBC recently secretly filmed a debt collector from doorstep lender Provident. She uttered the fatal words: 'If you allow customers to pay up, they won't be customers any more. You don't ever want to let them pay up. You want good customers to stay in debt.'
And this is the tricky thing about selling goods or financial services to the poverty economy. You want people to pay, but not too quickly. As Brighthouse's McKee says: 'I do not wish to overload my customers. I want you to own a product. I want you to take it and pay back over three years.'
The poverty industry is growing apace - the payday loan business alone is already worth £1.7bn - and it relies purely on our appetite for credit. What impact could this trend have in the long term? Dr Karl Dyson, a specialist in community finance and affordable credit from Salford University, warns: 'If we don't care about the entire financial system, especially those that are suffering its most extreme elements - at the bottom - it always comes back to bite us. We will all pay.'
For corporations in the poverty economy, finding the right kind of customer is key. Enter the dark art of consumer classification. The most extensive package on the market is provided by data firm Experian. It is called Mosaic and is helping over 50,000 companies - including thousands of credit firms - seek out customers from 155 profile types, based on their location, income bracket, credit history, even intelligence.
Luckily for McKee, his customers come to him. The generic Brighthouse customer is female, aged 25 to 35, with two kids, and on benefits. McKee reveals that he axed a newspaper marketing campaign because research discovered that TV was the preferred medium for Brighthouse shoppers. Indeed, Brighthouse even sponsored the Trisha Goddard Show on Channel 5 for a year to single out just the right people: those at home at lunchtime on a weekday. And let's not forget Wonga's recent sponsorship of Red or Black, the TV show where the only skill involved is to choose red ... or black.
Madbid is a different kettle of fish altogether. Founded in 2008 and backed by Atomico Ventures (Swedish entrepreneur Nik Zennstrom's outfit, which also has stakes in the likes of Skype and Angry Birds maker Rovio), the online penny auction is frequented by three million registered users, all looking to bid on a bargain: 'discounts of up to 81%', scream the Madbid ads. It is not technically a gambling site - there's too much skill involved, says founder Juha Koski, and the Gambling Commission seems to agree.
Koski doesn't want to reveal too much about the typical Madbid user - 'I could tell you but I'd have to kill you' - so MT did a little research of its own, combing through countless forums and comment threads. One phrase comes up again and again in reference to Madbid: it is 'a tax on the stupid', say the technorati. But this summation doesn't quite seem fair, given that you need the brains of Einstein and the gambling nous of Rainman to understand how it works.
From the 'Rookie' auctions (for first-time, uninitiated Madbidders only) to the 'sneak peek' system, which lets you buy the right to snoop at rival users' bidding behaviour, it's all but opaque to the outsider.
Koski cannot or will not reveal just how many users on average are failing to win items. However, he does insist that the Madbid model is zero-risk. 'If you bid £50 and don't win your item, you can then get a £50 discount off the product on the "Buy Now",' he says. Unfortunately, your discount expires after only 24 hours.
'The problem is that we can only guarantee the stock for a short period,' explains Koski. And what if users miss their Buy Now window, or - more likely - don't actually have the funds to buy the product at RRP (like a car, one of the most popular auction items on the site)? Koski declines to comment.
Which brings us to the tricky subject of morality. Are businesses transgressing a code of ethics by exploiting the financially vulnerable? Or should consumers know better? Christoph Klinger, founder of rival penny auction Yipii, is a firm believer in the former. His auction site is fully regulated by the Gambling Commission, so the back end is transparent and audited.
Yipii works on a pure affiliate model - brands pay it to generate sales for them. So if you spin the 'Wheel of Winning' and don't win your free iPad, the money you've 'gambled' turns into a discount, just like on Madbid. Except this discount doesn't expire. And you can spend the discount on any product you like, even household essentials like loo roll or bleach. 'I am a man of integrity,' says Klinger. 'The consumer can't lose. I don't want to exploit anybody or cheat anybody.'
But consumers aren't entirely without power these days, either. The rise of sites like MoneySavingExpert and social networks such as Twitter has given them a voice like never before. A consumer backlash recently forced Brighthouse to overhaul its eccentric system for coding products, which had made it impossible for customers to prove items were cheaper on the high street, neatly negating Brighthouse's 'price promise'.
If the financial crisis taught us anything about credit, it's that plenty of borrowers - be they companies, governments or private individuals - will borrow as much as they can get their hands on, not as much as they can manage to pay back. Calls for self-restraint tend to fall on deaf ears when there are health services to fund, rivals businesses to acquire or new smart TVs to be bought to keep up with the Joneses.
A generation of consumers has become used to this kind of instant gratification - six million people are predicted to take out payday loans over the next six months alone - and these new players on the bottom rung of the credit market intend to make sure it remains available to even the cash-strapped. Whether their customers - or the rest of the economy - can really afford it seems to be the one question that no one really wants to answer.
CORRECTION: Our article of 31 October 'Cashing in on the poor' stated that online auctioning company MadBid.com 'picked winners' and was 'deliberately targeting Britain's poor'. We would like to make clear that MadBid's auction mechanism is externally audited and that the company does not in any way pick winners or deliberately target the poor. We regret for any confusion caused.