With the consumer credit market now saturated by online and payday lenders, it was perhaps no surprise when the Japanese-owned company Speedloan Finance abruptly announced that it was closing high street pawnbrokers Albermarle & Bond and Herbert Brown. The decision to close the 116 UK stores was reportedly due to significant losses.
The closure is more bad news in what’s already been a hard year for the pawnbroking industry, with The Money Shop also announcing its closure. While pawnbroking was once thought to be a business that always did well in hard times, the industry has seen a decline largely due to competition from online and payday lenders, who offer easy access to short-term credit (although usually at a very high cost). The recent decline in gold’s value has also been a blow.
Although pawnbrokers don’t offer the most competitive credit rates, and clients do run the risk of losing cherished or sentimental items, the value they still have can’t be overlooked. While high street pawnbrokers might seem like a relic of days past, today, perhaps more than ever, they provide access to credit for borrowers who otherwise struggle to access mainstream lending.
Getting a loan from a pawnbroker is simple, straightforward, and unique among most other loan schemes. People wishing to take out a loan give a valuable item (known as a “pledge”) to the pawnbroker. Pledged items can be anything, but are typically jewellery, clothing or antiques.
The pawnbroker values the pledge and agrees to lend the customer part of its value (typically around half the market value) over an agreed period of time. The customer can redeem the loan at any time during the loan period and have their pledge returned.
If the loan isn’t repaid by the deadline, the pawnbroker can sell the item, returning any excess funds above the outstanding loan amount to the customer. Unlike a payday loan arrangement, these loans can be settled quickly without consumers building up impossible levels of debt.
Although borrowing from a pawnbroker is fast and convenient, it isn’t the cheapest form of credit. Interest accrues daily, between 5-10% a month. High street banks might charge the same rate over a year. However, pawnbrokers offer a much better rate than payday lenders, whose annual interest rate can be anything up to 100%. The main advantage for using a pawnbroker is that because the loan is secured on goods, there’s no need for a credit check.
In the UK, pawnbroking is regulated by the Financial Conduct Authority (FCA). This means pawnbrokers have to meet and maintain strict standards of solvency and conduct, and that consumers who feel they haven’t been treated fairly aren’t left without a remedy. Consumers entering into a credit agreement with a pawnbroker are entitled to a 14-day cooling off period – which allows them to change their mind and walk away from the contract without a penalty up to 14 days from signing – just as borrowers from any other regulated business.
Under FCA rules, all authorised lenders offering unsecured access to cash – whether via a credit card, loan or overdraft – must conduct a creditworthiness assessment of the customer. The assessment is a key component of responsible lending and is designed to ensure that consumers don’t borrow more than they can manage to repay. However, pawnbrokers aren’t required to do creditworthiness assessments because their credit is tied to a valuable item.
Creditworthiness assessments used to be done via an interview with the local bank manager. Increasingly, these assessments are now conducted online using highly sophisticated software driven by artificial intelligence (AI). These assessments are found to be much more accurate than traditional models in predicting defaults.
AI assessments may take into account thousands of data points on a single consumer, harvesting information not only from bank statements and payslips, but also from social media, shopping habits and online browsing history. Because the algorithms used to assess a consumer’s creditworthiness are generated by AI, very often the lender itself is unaware of the criteria being used to assess a consumer. The conduct of the assessment may have a serious impact on financial inclusion for marginalised consumers.
Although regulations state that a creditworthiness assessment must be made, there are no clear guidelines on how the assessment should be conducted. Clearly, a thorough assessment of a consumer’s financial status is important not only to protect the consumer and lender, but also to avoid a repeat of the credit crunch of 2007-8 and the ensuing financial crisis.
However, assessments that are too restrictive may actually distort the market by unfairly discriminating against certain groups of consumers. An assessment based on the customer’s documented financial history, by reviewing bank statements and payslips, will automatically reject applicants who have never or only recently opened a bank account, or those who can’t provide proof of stable employment.
Although such applicants might represent a high risk for lenders, they may in fact be at low risk of default – some might have a thin credit history because they’re young, a recent immigrant, or employed on a zero-hours basis.
Many lenders now operate a rate-for-risk pricing model where the cost of credit is linked to the outcome of the creditworthiness assessment. Even if a high risk consumer is accepted for credit, they’ll typically be charged a higher interest rate because of the perceived risk resulting from the assessment. On the other hand, consumers who are rejected by mainstream lenders have few choices other than to borrow from friends and family, or to go without needed items.
This is where pawnbroking has a crucial role to play. Although it’s expensive and carries a risk of losing loved or sentimental items, it also offers several important advantages over payday lending.
For consumers whose credit histories (or lack thereof) would exclude them from mainstream credit sources, such as those without bank accounts, pawnbrokers represent a lifeline in terms of access to affordable credit – especially where that credit is used as a means of smoothing short term cash flow.
One of the FCA’s own criteria for a functioning credit market is inclusivity. Far from being obsolete, the pawnbroker is vital in combating financial exclusion. If the collapse of Albermarle and Bond is an indicator of an industry in decline, consumers who are excluded from mainstream credit will have fewer alternatives than ever.
Joanne Atkinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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