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Operation Choke Point – How pawnshops can find capital when they are blacklisted
The Department of Justice suggests that the operation is to combat unlawful mass-market consumer fraud by targeting 30 high-risk industries, as labeled by the Federal Deposit Insurance Corporation (FDIC) in a 2011 report titled “Managing Risks in Third-Party Payment Processor Relationships.” For the full list – click here.
Pawnshops do not appear on the list, but the Obama administration officials behind Operation Choke Point frown upon pawn shops and gun dealers. And they have let the banks know this. As a result, pawnbrokers are losing bank accounts without any notice citing “high risk.”
What do you do when capital to expand your business is hard, if not impossible, to find?
One way is to do with what you have and make it work harder for you. With little risk and no additional borrowing, this is a good practice to understand because it is the easiest business practice to implement.
Let’s look at Gold over the last 6 years and why we love it. Gold in the pawn business is better than gold anywhere. Pawnbrokers lend between 40% – 110% of the current market rate on Gold. That is a serious variance in loan to value practices.
There are 3 primary reasons why pawnbrokers love Gold.
1. Easy to valuate and authenticate – Pawnbrokers of all caliber can easily validate and evaluate gold. Confidence in the collateral is currently at its highest level.
2. Immediate and cheap liquidity – Since the price of gold has gone from low $200’s to $1300 today, consumers are not purchasing gold to resell so most gold is being scrapped and refined for immediate cash.
3. Most people redeem their loans – Jewelry pawn loans have a high redemption rate.
When the price of gold was low, retailing gold as jewelry was a great way to maximize your selling opportunity. Jewelry inventories were turning 1 time per year and margins were about 55-65%, but selling jewelry required experienced and skilled sales people with calibrated commission structures.
When the price of gold went up and up during one of the worst economic down turns, consumers could not purchase gold, and therefore gold was pushed into buckets and sent straight to the refiner.
During the last 6 years, there was a double bonanza – no more sales personnel to sell jewelry, cost to sell dropped dramatically, and gold sold at the refiners 15-20 times faster.
As individuals and businesses saw opportunity, it appeared as if everybody in the world went into the gold business resulting in a decrease of margin. But even if you worked on a 5% margin turning gold 15 times a year, you would still yield 75% gross profit.
Putting most of the customer’s gold into loan turned out to be the gold rush for pawnbrokers.
Things are changing and that was yesterday. What about today?
The principal of lending high and selling fast can be applied to any item that comes over your counter. This requires pawnbrokers to get into the same frame of mind as lending on gold. It can be done.
Under the same premise as taking in gold, with the right data, you can increase your loans, increase your liquidity, and increase your profits at the end of the month by as much as 50%.
There are (still) 3 primary reasons why pawnbrokers can love each general merchandise item as much as gold.
1. Easy way to evaluate and authenticate – Consistent method to objectively access the quality of the products you are taking in as collateral. Easy to access research through the web and product data.
2. Solid data on liquidity – Pawn Sense – Powerful data that shows you how long something takes to sell, where to sell it, for how much, and what the default rate is on the item. Empower yourself with data that differentiates the value of the item by the quality.
3. Most people redeem their loans – Looking at the data, you will know the default rate
Operation Choke Point may be designed to destroy the pawn industry, but pawnbrokers are resilient. Using the inventory you have, the collateral you take in, and the tools now affordable and readily available, you can continue to thrive.
We would love to talk about your business. Reach out to our industry expert, Steve Mack, any time.