Pawn shops are anxious, but consumers have the most to fear

January 20, 2020 - Pawn Resources

The pawn industry has been around for thousands of years.

It’s growing faster than ever before, thanks to a  growing cultural profile, along with new anti-payday loan regulations. How is the industry– especially corporate pawn businesses– reacting to these changes, and what do they mean for the 30M Americans who rely on pawn shops?

New rules from the Consumer Financial Protection Bureau will encourage more consumers to use pawn shops instead of payday loans. To protect them, the pawn industry must come online.

An uncertain future for small businesses?

In April, PawnGuru surveyed over 100 independent pawn shops in the PawnGuru network to get their perspective on the economy. While they’re optimistic about business this year, they’re very worried about getting squeezed out by corporate shops in the long term. Like small independent players in many industries, pawnbrokers face enormous competitive pressure – from one another, from big corporations, and from tech companies like Craigslist.

“I think [the pawn industry] is going the way of the chain store”, wrote one of our respondents. Another pawnbroker echoed that: “[We’re] one of the last mom and pop family businesses left. But corporate is coming.” Other shops had particular adversaries in mind: “I think Walmart coming in ruined everything.” 

Pawn corporations understand that consumers who can’t access payday loans will look for other options. To take advantage of growing demand for pawn loans, they’re growing and reorganizing. Corporatization in pawn is a long-time coming, and the shift from payday towards pawn is accelerating it.

price disparity items
Pawn shops make varied offers on the exact same items, but consumers can rarely comparison shop– making a highly inefficient market.

How corporate grew: capital, overhead and software

But how did corporate shops grow so powerful to begin with?

First, as we’ve talked about before, pawn shops have to find capital in order to lend it. Big companies can secure more capital to lend, relying on debt from large Wall Street firms rather than small local institutions or individuals. EZCorp can go to JP Morgan, but Bill and Jean at Neighborhood Pawn can’t.

Second, chains have lower overhead. They keep it low in part by developing training programs and implementing them uniformly, just like McDonald’s. They also try to reduce the amount of expertise a given employee needs, allowing them to hire cheaply, onboard fast, and not worry about employee churn. This is where technology plays a big role.

In order to keep shops lean and labor cheap, corporate pawn shops need something else– software. They write and buy software to run stores more leanly, lowering overhead. They write software to determine the value of goods, rather than teaching employees to determine it themselves. This makes employees cheaper to train and stores cheaper to run.

Finally, corporate shops have lower per-customer marketing costs. They use name and brand recognition to draw customers in, and negotiate better bulk advertising deals with traditional media outlets.

30M Americans rely on pawn shops. What does this mean for them?

On April 28, CashAmerica and First Cash– two of the industry’s biggest players– announced their intent to merge. In the weeks after, Google banned payday lenders, and the Consumer Financial Protection Bureau issued new payday rules all but ending the industry. The success of corporate pawn shops, as well as their preparations to thrive in a changing regulatory environment, worries indie stores. But should it scare customers too?

So far, the entry of corporate pawn shops has actually improved competition for customers. Corporate shops tend to be more efficient; leaner shops tend to make bigger offers. However, the consolidation of the industry has consumers wondering whether more efficient pawn shops will be able to offer them even more money, or whether reduced competition will leave them even worse off.

Looking at the ways consumers use pawn shops now sheds light on this question. Pawn shop regulars tend to be financially vulnerable, leaving them with little negotiating power or ability. They rarely have the luxury of going store to store, lacking time and transportation. As a result, most consumers are effectively forced to take the first price at the first shop they visit. However, the average offer size varies between pawn shops by nearly 260%.

Thus, the real challenge pawn consumers face is getting immediate access to a wide range of brokers. While the corporatization of pawn has had a relatively small impact on direct storefront access so far, we believe the immediate answer to the access problem is to bring the industry online, where more people can begin the process of selling an item or getting a loan.  So why hasn’t it happened already?

Average difference

How finance neglects low-income consumers

The lack of technology in the pawn industry is due to the large number of small independent shops who lack the financial and technical resources to build consumer tech. It’s also due to the relative lack of technological expertise in pawn corporations, which have relatively low margins and budgets for innovation.

Needless to say, pawn compares positively with the other types of financial services firms that primarily serve low-income consumers. While pawn is less developed, these other industries have developed technological innovations to grow their profit margins. But this technological build-out is not aimed at improving the experiences of their low-income clients– in fact, major banks and payday lenders are far likelier to use it against them.

People avoid the mainstream banking system in part because of the huge and ever-growing fees banks levy on their customers. For example: banks have the technological ability to refuse transactions, but they would much prefer to overdraft customers– then levy huge fees. In fact, they restructure transactions to accrue even more charges. We’re not the first to notice this; the Federal Deposit Insurance Company and Forbes have both written about it before. Other industries, like the payday loan giants, spend countless dollars on building technology that hurts consumers by locking them into a hard-to-discharge debt spiral.

What can be done?

To improve banks and payday lenders, we can look to official bodies like the Consumer Financial Protection Bureau. But the answer is simpler for pawn shops. To improve consumer welfare, pawn shops need to be more transparent and accessible. That means not just making pawn operations leaner or more competitive, but bringing them online.

Today, the overwhelming majority of pawn shop regulars have smart phones. They increasingly rely on the mobile web to get vital information. By making themselves available online, pawn shops can ensure consumers get the best deal possible. This is the standard in nearly every other retail industry. Why should pawn be any different?

Questions about pawn, the internet, and underbanked consumers? Reach out to Jordan Birnholtz, co-founder of PawnGuru, at jbirnholtz at pawnguru dot com.

David Stiebel
David Stiebel

David Stiebel is one of the cofounders of PawnGuru. David was educated at MIT, where he studied Math. He subsequently worked at Bain as a data scientist before starting PawnGuru in 2015. He started PawnGuru to build a better tool for pawn shops and consumers to connect.

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