As Pawnshops Thrive, Banks Steer Clear

SAN ANTONIO - Bankers should be so lucky as to have customers like Mary Lou Flores.

The young mother hands a ticket across the jewelry-filled display case at Express Pawn along with $13.91. In exchange, she gets back the silver watch she pawned recently for $10.

That's right. She just paid 39% interest to borrow $10 - and she kept the money for less than three months.

Small Deals Make the Industry

On tidy little transactions like this, the U.S. pawnshop industry has mushroomed in recent years. Since 1988, in fact, total loans outstanding at pawnshops have probably tripled, to somewhere in the neighborhood of $2 billion.

Though that number seems small in relation to overall consumer loans made by banks, the fact is that it rolls over regularly, with pawnshops making more than 35 million loans a year. Clearly, for many of the 20 million Americans who don't do business with banks, pawnshops are an important financial service.

Like most pawnshop customers, Ms. Flores makes a trip to the pawnshop every few months, usually with jewelry or a stereo in tow. She says she trades possessions for cash to pay bills or buy "Pampers for the kids."

Growth Has Been Strong

With economic times tough in many areas of the country, the number of pawnshops in the United States has probably grown 60% over the past four years, to about 8,000 according to John P. Caskey, an economics professor at Swarthmore College who has written a history of pawnbrokers.

That 8,000 number is significant, given that the country now has about about 12,000 banks and some 2,000 thrift institutions.

With this expansion has come a new breed of pawnbroking professionals who are mixing business-school management skills with retail marketing know-how.

They are creating an industry that is shedding its barred-windows and green-eyeshade image - and sometimes meeting head-on with conventional retail banking.

Move Toward Acceptance

"Gradually, we'll see it as a very accepted industry and another convenient way of doing business," said Charles T. Barrett Jr., president and chief executive officer of Express Cash International Corp., one of five pawnshop chains that have issued stock to the public.

Sitting in an elegant office reminiscent of a private banker's quarters - complete with leather couch and model ships - Mr. Barrett charted an ambitious growth plan for his San Antonio, Tex.-based company. Express Cash operates nine stores, each called Express Pawn, up from two when it was founded in 1988. The company expects to have 14 by early next year.

Mr. Barrett, who migrated to the pawn business after a career as an accountant and venture capitalist, said he expects his company to bring in annual revenues of $100 million within five years, up from about $6 million today.

Stock Pattern Mixed

Such heady growth plans have hampered profits. Partly because of the cost of expansion, Express Cash just about broke even last year, and in this year's first half showed a profit of only $37,000.

Impatient for results, shareholders have driven the company's stock price down to 5 1/4, down from $6 when it was first offered to the public nearly two years ago.

By contrast, shares of Cash America Investments Inc. - the nation's largest pawnbroking chain - have more than tripled in value over the past five years.

Mr. Caskey predicts that commercial banks will one day wake up to the profits of pawnbroking and enter the business through separate subsidiaries. One indication that pawnbroking has been recognized as a profitable business: Several major banks have bought shares in Cash America as an investment.

Banks Not Eager

Not surprisingly, few bankers are willing to concede a place for pawnbroking in their future. After all, banks are already taking heat about charging 19% annual interest rates on credit cards. What would happen if they started making loans to poor borrowers at several times that rate?

"We're in the banking business, and we'll leave the pawnshop business to others," said Pat Frost, senior vice president in charge of retail banking at Frost National Bank, in San Antonio.

"Are you really doing your customers a favor charging them that kind of rate?"

Given that pawnbrokers make some 40 million loans a year, banks may not shun the business forever. To be sure, the average pawnbroker's loan is short-term and only for about $50, the volume is whirlwind - and profitable. Indeed, interest rates are nothing short of astounding.

Pawnshops consumers pay annual interest rates that range from 36% to 240%.

Collateral Is High

On top of that, the loans are far more secure than most bank loans, given that pawnbrokers generally don't lend out more than 50% of the resale value of the items that are hocked. Thus, a rise in delinquent borrowers can mean a rise in profits. After all, to break even on a bum loan, the brokers merely have to sell off the collateral at half-price.

While bankers and consumer advocates criticize the high rates, the new moguls of pawnbroking contend they are providing a valuable service to people with nowhere else to turn for credit.

And some customers see little difference between banks and pawnshops.

Ms. Flores agrees. "This is how I take out a loan," she said. "When we need money, they're here."

A Bridge Loan

Mark Papich, wearing glasses flecked with white paint from a recent job, said he doesn't want a checking account or a credit card.

The San Antonio construction worker - trading an electric tool for $23 - said he turns to the pawnshop when he is "waiting on a paycheck."

"If you don't have a Visa card, if you don't have an automated teller machine card, where do you go," asked Larry E. Nuckols, vice president of operations at Express Cash.

"If you go to finance companies, they want credit histories. If you go to banks, they want you to have a CD to put up for a loan these days - at least in Texas. So they need someplace to be able to come, and we're that source for them."

On the Malls and Highways

Express Cash, whose stores are in strip malls and on heavily trafficked roads in and around San Antonio and Houston, estimates that 80% of its customer base is working-class. The rest are white-collar and clerical workers, many of whom have been hit harder than blue collar workers in the current recession.

Walking into an Express Cash outlet is like a trip to the local K-Mart, with a more electric mix of merchandise. Jewelry displayed prominently in glass cases is tended by employees wearing matching shirts with the company logo.

Behind them are walls and industrial shelves stacked with fishing poles, guns, vacuum cleaners, and electric guitars. An occasional oddity, such as an ultrasuede jacket, stands out against the utilitarian gear.

Jewelry Is Font of Business

Pointing to the contents of a safe in the back of his warehouse, Brett Kaufman, manager of an Express Pawn store in San Antonio, said the new emporiums in some ways aren't very different from the three-ball, mom-and-pop owned pawnbrokers of tradition.

Jewelry collateralizes about 70% of the $140,000 in loans outstanding at his store. "That's the heart of the business," he said. "It always has been."

Similar to industry norms, more than half of Express Cash's customers are regulars. They take out average loans of $51, and 76% of customers redeem their loans. The average redemption period is 57 days on a 30-day loan that has a 60 day extension. At Express Pawn stores, sales of collateral account for 60% of revenues and 40% of profits.

A Marketing Ploy

Express Cash, which has 75 employees, gives its best customers preferred cards entitling them to a 10% discount on purchases.

Like other public chains, it offers regular training and management sessions for employees and sets profit goals for each store.

Eight of the nine Express Pawn stores are linked on a computer system, enabling the company's brokers to track customer activity and move merchandise from store to store. The chain's remaining store is in the process of being hooked in.

The companies, claiming ambitions to serve the full financial needs of their consumers, are expanding into other products as well.

Up to now, every time Express Cash has opened a new store, an opportunistic entrepreneur cuts the ribbon on a check-cashing business next door.

Check Cashing to Get Test

In response, Express Cash is about to test a check-cashing service. Compare that to banks, who have been lobbying Congress unsuccessfully for years to get into new businesses, including mutual funds and insurance.

The difference, of course, is that banks are being regulated as if they had a monopoly, which they do not. Pawnshops, by contrast, often function in an atmosphere that is much closer to the free market. The result: Poor people have access to loans, but at a market price.

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