As you may remember, the financial crisis caused a lot of credit card issuers to crack down on the credit quality of their portfolios--lowering credit limits, denying new applications, even cancelling cards, even though the customers weren't yet delinquent. Meanwhile, the other traditional recourse of the financially troubled family, the home equity loan, was impossible in most cases because home values had dropped so far. Arguably, this trend is now being exacerbated by rules which are intended to protect consumers, but which also make credit more expensive.
Pawnshop respectability surged when the economy faltered, noted the National Pawnbrokers Association's Murphy. He says pawnshops serve the middle class who were cut off from credit, as well as the millions of Americans who don't bank and have no checking or savings accounts. Murphy says pawnshops also reported during the downturn that restaurant owners were trading in jewelry to make their payroll.
Pawnshop and quick-loan centers fill a market niche because most community and regional banks view working-class clients as risky borrowers and don't want to deal with small loans. Coffey sees these pawn chains continuing to grow, since banks likely won't encroach on their territory.
In fact, Coffey says EZCorp and Cash America operate like regional banks. They set up a branch system and train their employees to make hundreds of small loans and determine the right value for each loan without overpaying for the item.
Managing store growth is critical to pawnshop growth, Coffey says. "The dynamic for value creation is the same that drives a retailer," he said. Staying ethical, explaining the loan fully, and maintaining the pawnshop's new clean reputation are also keys.
Reputation, says author Gaines-Ross, fuels a firm's growth. "The reputation is a company's competitive asset; it affects a big portion of a company's bottom line," she said.
Consumers on limited incomes have two features that make them unattractive to lenders: they are more likely to default (and lack assets to seize if they do default), and there are a lot of them, doing a lot of very small transactions. High transaction costs on small deposits or loans make these accounts less profitable, something bankers make up with a combination of fees and higher interest rates. Ban these, and the bankers will do their best to shoo these customers away.
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