When Information Technology meets Government Regulation - the demise of Wonga and its significance elsewhere

The cause of Wonga’s demise is not that it lost its customer base, but that its business model had become unacceptable to the Government. It is certain that more innovative technology platforms will come under government scrutiny, and further regulation is likely to follow. Information Technology Leaders should take note.

The announcement that Wonga has gone into administration will draw little sympathy from most people. Whilst it claimed to be a technology solution for the short term credit needs of ‘tech-savvy young professionals who previously used the banks to borrow money’, the reality was that it created a demand of its own, way beyond this category and encouraged excessive borrowing from vulnerable people who had no chance of paying back the loans, nor paying the extreme rates of interest; perhaps the sorts of people that would otherwise turn to unregulated loan sharks. So whilst Wonga could legitimately claim it was helping some customers with an innovative service, the perception was that it was no better than the unregulated payday lenders that it was replacing.

Ever since 2011, concerns about payday lenders had been raised to the government and in 2014 the Financial Conduct Authority imposed strict regulations on the entire industry, which greatly effected Wonga’s business model and profit line. Wonga’s problems were further compounded in 2014 by allegations of dishonest and unethical debt collection practices, which led to Wonga accepting huge write offs of customers’ debt and an admittance that “Today is not a proud day for Wonga”. In the last four years, Wonga has struggled to make a profit, has been overwhelmed with the scale of the claims against it and it has culminated in the company’s demise. It is clear that this regulation changed the business environment and ultimately destroyed Wonga’s business model.

It turns out that Wonga’s clever algorithms (driving the artificial intelligence on the platform) that were supposed to prevent unsuitable online applicants from taking out these loans were not clever enough, or possibly that there was not enough human oversight of the growing customer base of unsuitable debtors. This should have raised alarm bells at the board of Wonga, but perhaps what is sometimes called ‘the catastrophic success’ of a fast growing company hides the trouble that may lie ahead and mask what is really going around the business. Perhaps a misunderstanding of the reliability of the AI (Artificial Intelligence) was another reason, perhaps just living in a state of denial is another, or perhaps it was a case that the company had failed to maintain its aim, (known to military types as the First Principle of War).

Wonga are not alone as a technical disrupter that has experienced a tougher stance from governments, both in the UK and elsewhere. The explosion in information technology and the ‘Gig Economy’ over the past 20 years has seen unbelievable innovation and a revolution in the way we live our lives and the way we work, and it has always moved at a tempo that has been too rapid for governments to both understand and react to. A recent example is to look at how long (many years) it took for the EU’s GDPR regulations to become law - and no doubt it will now need updating frequently, which will be hard to do.

However, there is a growing realisation that governments have got to wake up to the new tempo and scale created by the Information Age, and that in the absence of responsible self regulation, it has a vital role in controlling the information technology industry for the good of society. Take social media for example. The once self regulated industry, is now under intense pressure from governments across the world, especially since the Facebook/Cambridge Analytica scandal, a subject written about by SixFigureGrid a few months ago, ('Information Wars'). There is much debate about how Google’s search engine can manipulate what data we see first and how political influence can be brought to bear through clever use of technology platforms. The EU has taken Google to task, threatening huge fines. Another example is the giant and ever growing online retailer, Amazon, which is disrupting the retail market in ways that we have never seen before. Closures of big brand names on the High Street are now commonplace, such as the recent collapse of House of Fraser. A number of other big names on the High Street may be gone within a year. This retail disruption is so great that it is forcing governments to think about the regulation of online companies and to analyse whether their advantages over traditional brick and mortar retailers are both too great or unfair, and possibly not in the long term interests of the country, its economy and its people.

Last but not least there is the issue of tax avoidance by online companies operating outside of the UK's tax jurisdiction, placing a disadvantage on UK retailers. Legally there is no case to answer, but economically and ethically there is a case for government intervention.

Questions for Information Age Leaders

Thus it is the opinion of SixFigureGrid that as we move through the Information Age, more government regulation is on its way, be that a good or a bad thing for business, the consumer or the government. For business leaders, entrepreneurs and investors today, this asks a few important questions:

1) Has the situation changed from when we started our business enterprise?

2) Just because a new technology platform/application allows us to do something that is technically legal now, is it ethically right to do so and what are the dangers and risks of proceeding?

3) Do we really understand the power of the technology that we are deploying?

4) Is our disruptive technology service having the desired effect and output, or is it being used or abused in ways that are bad for either the business, our customers or possibly society as a whole? If it is, then what should we do about it?

5) In the disruptive business we are in, what is the likelihood that at some point, government will attempt to regulate the industry and if so, can we live with the uncertainty, or what should we do about it?

6) As the UK prepares to leave the EU, how will new legislation changes effect our business, be that from the UK, the EU, the USA or from across the globe?

And for government, there is the more fundamental question of asking what its role is in governing and regulating the Information Technology sector and what the pros and cons are of such regulation. The debate is hotting up and is certainly not going away.

SixFigureGrid is passionate about helping leaders understand the opportunities, threats and complexities that the Information Age poses on businesses. This article has touched upon many of its Information Age principles, namely Scale, Tempo, Perception, Innovation, Security, Ethics and Uncertainty. If leaders can look at problems with these principles in mind, they stand a better chance of running and growing businesses successfully.

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