In May and June, the financial industries that serve low-income Americans began to change in big ways. First, the Consumer Financial Protection Bureau proposed new rules for payday lenders. The first banned lenders from withdrawing money directly from their customers’ bank accounts, while the second restricted their ability to lend by imposing credit limits.
Then Google announced its intent to ban payday and title lenders from advertising in search results. Finally, two of the largest corporate pawnbrokers, Cash America and First Cash, announced plans to merge.
The merger anticipates that the decline of payday lending will drive even more customers to pawn shops. Cash America and First Cash are likely right to make that bet, but the decline of payday lending won’t be the biggest force in the increase of pawn shop customers this year. That distinction belongs to the Internet.
Data shows that over 80 percent of shoppers consult their smartphones before making a purchase. Nearly every retail industry has a presence online, making prices and other information easily available to digital shoppers. Why should the pawn industry be any different?
Pawn shops are a financial lifeline for nearly 30 million Americans, and thanks to shows like Pawn Stars, their cultural profile has also grown in recent years. But despite that attention, the pawn industry remains remarkably traditional. This lack of innovation hurts shops and consumers alike, but the real impact is borne by the pawn shop’s clients.
On average, prices vary between pawn shops by nearly 260 percent. For the tens of millions of Americans who use pawn shops as a source of emergency cash, that translates to a fluctuation of hundreds of dollars. But there’s a problem: People who rely on pawn shops for a quick infusion of cash rarely have the luxury of comparison shopping. To go from shop to shop to try and get the best deal would be an enormously time-consuming burden.
This means they’re forced to take the first offer they get, leaving hundreds of dollars on the table. For those who use pawn shops as a creditor, hundreds of dollars is the difference between making ends meet and not. When my co-founders and I saw that disparity a couple of years ago, it prompted us to ask: What if people could use the Internet to get offers from multiple pawn shops without having to physically visit them?
When we started PawnGuru, we knew that financial tech could be harnessed to work effectively for low-income and underbanked consumers. In the developing world, digital currencies like M-PESA improve local trade, creating more robust economies. But too often, it seems that low-income consumers in the U.S. fail to benefit from fintech.
The lack of technology and innovation in the pawn industry isn’t a deliberate choice, but comes from the large number of small, independent shops that lack the financial and technical resources to build a custom e-commerce platform. It’s also due to the relative lack of technological expertise in the industry, which has fairly low margins and not a lot to invest in innovation.
That suggested to us an opportunity: build an online marketplace where pawn shop customers could get items appraised ahead of time. We started PawnGuru in Detroit two summers ago to do just that, and began immediately to sign up shops and encourage their regular customers to use our site.
Our timing was good. Low-income consumers were eager for alternatives to the notoriously usurious payday loan industry. Simultaneously, smartphone adoption in that group was at an all-time high—which turned out to be critical to the success of our model. Pawn shops were increasingly aware of the business they were losing online to other services, like Craigslist and OfferUp. Finally, the “normalization” of pawn shops in pop culture meant middle-income consumers, in search of deep discounts on retail items, were newly eager to shop there.
If you’re unfamiliar with the pawn industry, you should know that pawn shops serve three fundamental roles: to buy items outright, to make loans on items, and to sell items. On PawnGuru, about 50 percent of our users are selling items outright, while 20 percent are buying them. Those users are a mix of pawn shop regulars and middle- to high-income consumers, seeking convenience and better-than-retail deals. The remaining 30 percent are underbanked consumers getting cash loans on the basis of the value of their item brought in to pawn. If they repay it—and nearly 90 percent do, according to the National Pawnbrokers Association—they’ll get their item back. To date, we’ve received just over 70,000 requests from more than 50,000 people looking to pawn, sell, or buy items from local pawn shops.
With the popularity of pawn shops poised to grow exponentially, transparency in the industry has never been more important. The Internet has made retail more transparent in virtually every other vertical. Pawn should be no different.
