Linda Ballard, 61, uses the word "love" to describe her banking relationship, lauding the ease of cashing her bimonthly paycheck, the convenience of text alerts about her balance and the features on the platinum card that she was upgraded to in July.
But she is not getting all this from a bank. She is getting this array of services from a pawnshop – part of an industry that has long had a reputation of taking advantage of vulnerable customers handing over prized possessions in exchange for cash.
As banks zero in on more affluent customers who promise twice the revenue of their lower-income counterparts, shutter branches in poor areas and remain stingy with credit, pawnshops are revamping their image and stepping into the void to offer financial services.
"The way the banks have tightened up so much on making small loans and making equity loans, we’ve kind of evolved into, I like to call it the poor man’s bank," said Robbie Whitten, chief executive of Money Mizer Pawn and Jewelry of Columbus, Ga.
There are, however, plenty of potential drawbacks, consumer advocates say.
Some loans from pawnshops can come with interest rates as high as 25 percent. And fringe financial operations, the consumer advocates say, can imperil lower-income customers’ ability to save for the future. Without a traditional checking or savings account, borrowers often pay more for basic financial transactions like cashing checks, paying bills and wiring money, financial counselors say. And because pawnshops do not seek or report matters affecting credit scores, pawnshop banking makes it hard for customers to build credit history.
"Consumers need to be aware that the products don’t always carry the same protections as those you would get from a bank," said Tom Feltner, director of financial services at the Consumer Federation of America.
How fast the pawnshop industry is growing is unclear, but the industry association estimates there were 10,000 pawnshops in early 2012, the latest figures available, compared with about 6,400 in 2007.
That expansion is, in part, fed by the rising number of Americans whose tarnished credit effectively bars them from the mainstream financial system. The growth has attracted the attention of the Consumer Financial Protection Bureau, a recently formed regulator that has been scrutinizing pawnshops, along with other nonbank lenders like payday loan operators.
EZCorp, a publicly traded operator of pawnshops, reported that total loan balances swelled 22 percent to $44 million in its most recent quarter.
Another publicly traded lender, Cash America International, told investors in June that the company’s fortunes were growing as more "traditional consumer lenders are exiting the market."
As a result, pawnshops are offering services like check cashing, Western Union money transfers, bill payment and prepaid cards to customers who are "getting forgotten in the banking system," said Jerry Whitehead of the Pawnshop Consulting Group.
The services are not, generally, big moneymakers for the shops. The main attraction is that they bring in traffic, and many of those shoppers go on to buy items from the pawnshop or to take out a pawn loan themselves – and that is where the stores make their money.
The basic business of pawnshops is, of course, a financial service. If a man walks in and hands over, say, a watch, the shop will lend him money based on a percentage of the item’s value. The customer has a set period of time to pay that back, usually one to four months. If he pays it back in time, and pays the interest, he gets the item back. If he does not, the pawnshop sells the item.
Pawn loans are so profitable simply because of the high interest rates pawnshops can charge. Interest rates vary by state, and range from 2.5 to 25 percent a month, the industry group the National Pawnbrokers Association estimates. So a 30-day loan on a $150 item would give a pawnshop a profit of up to $37.50, while a four-month loan could mean a profit of $150. Pawnshops may also charge fees for things like storage and lost tickets. Yet for many customers who have been denied credit because of checkered financial histories, an instant loan from a pawnshop can feel like something of a miracle – at least at first – consumer advocates say.
But the high interest rates can plunge borrowers already on precarious financial footing deeper into debt, consumer advocates say.
Emmett Murphy, a spokesman for the pawnbrokers’ association, said about 85 percent of loans were paid off, and pawnbrokers would much rather see a loan repaid than deal with selling a pawned item.
La Familia Pawn and Jewelry, a chain based in Winter Park, Fla., that focuses on Hispanic customers, began offering bill-paying services this summer and will add Western Union and prepaid debit cards soon, mostly because customers wanted convenience, said Woody Whitcomb, chief financial officer.
"Some customers actually asked if we could be their bank, which we can’t, because we’re not licensed to take deposits," Whitcomb said.
La Familia charges $1.50 for each bill paid and uses the standard Western Union rates, but the point is to get customers using its much more profitable pawn loans.
"The pawn business will always be our bread and butter," he said, "but if we can give customers other reasons to come into our stores, that will increase traffic."
David Sanchez, 38, who lives in Hanes City, Fla., says he uses his local La Familia shop as "an interim banking system." For money between paychecks, he regularly pawns a gold chain in return for a $100 loan for 30 days, with a $25 fee at the end – even though he has a checking account and a credit card. Now, he is paying bills and cashing checks at La Familia.
"I really do not go into my bank," Sanchez said.
Pawn America, a Minnesota chain, has gone a step further in emulating banks: building financial centers with a separate entry that abut most of its pawnshops. Go in one way, and you can hock your ring. Enter the adjoining room, and you see "nice, private teller windows, and that’s our financial center. You’re going to be served by somebody wearing a white shirt, a tie, very professional," said Chuck Armstrong, chief legislative officer.
And its services look awfully similar. Under its Payday America operation, customers can get a one-year line of credit of up to $1,000 without putting down an item. And this year, it introduced a platinum version of its prepaid debit card with express-lane checkout, 5 percent cash back on purchases or 5 percent extra on loans, and free check cashing.
Ballard, of St. Paul, Minn., is a Pawn America customer who received the platinum card in July. She said she was initially wary of the industry.
"The first time I went to a pawnshop, I looked around to see who was looking at me go in," she said. Now, though, despite her bank checking account, she cashes her paychecks at Pawn America rather than using direct deposit. And she loves her new platinum card.
She has other financial products, she said, and, "I would give them all up but that one."