Will Wonga crush The Cash Store?

Wonga comes to Canada

Its TV ads give Wonga a friendlier face than its payday loan peers. (Vimeo)

Its TV ads give Wonga a friendlier face than its payday loan peers. (Vimeo)

In Canadian advertising, no real estate is more prized than the NHL playoffs. A 30-second TV spot during the hockey marathon can sell for $140,000 or more. So when Wonga, an online short-term loan provider, began blanketing this year’s playoffs with ads, the message was clear. The British company isn’t dipping its toes in the Canadian market; it’s making a splash.

For investors in the Cash Store Financial Inc.—currently the largest publicly traded Canadian payday loan provider—that could be bad news. The last thing the Cash Store needs is another competitor. It already has Nasdaq-listed DFC Global Corp., operator of 487 Money Mart outlets in Canada, to contend with. Wonga boasts lower overhead, better branding and a loan formula it claims takes much of the peril out of lending to high-risk borrowers.

Estimated default rate on Wonga’s loan portfolio (Source: BBC)

Edmonton-based Cash Store was once an investment darling. But the love has faded in recent years thanks to lawsuits and regulatory crackdowns. Shares in the company, which traded for more than $6 as recently as last August, are now down below $2.50. At this point, only one analyst, Dylan Steuart of Stonecap Securities, still covers the stock. He ranked it a Sell with a price target of a measly $1.75 in June. (Cash Store declined to comment for this article.)

$2 billion
Estimated payday loan volume in canada 2009 (Source: Gov’t of Canada

Even without Wonga, in other words, Cash Store’s prospects weren’t bright. In fact, investors may want to consider investing in Wonga instead. The company is currently privately held but has been floating the idea of launching an IPO for more than a year. Backed by blue-chip venture capitalists, including Accel Partners (an early investor in Facebook), Wonga looks destined to go public at some point, either on the Nasdaq or in London. And with a history of profitability and growth, investors will likely scoop it up—provided they are ethically comfortable with the business.

For all its success—the company claimed a nearly US$100-million pre-tax profit in 2011—Wonga has attracted controversy. Annual interest rates on some of its U.K. loans top 6,000%. Critics, including the Archbishop of Canterbury, have charged it with exploiting the vulnerable. But those accusations are nothing new for the payday loan sector. And if the list of VCs who have already poured money into the company is any sign, they aren’t likely to stop other investors from buying in if they get the chance.