Thursday, August 29, 2013

Banking For The Poor: Pawnshops

Money Matters
Pawnbroking has changed little since its origins in fifth-century China and medieval Europe: small loans are advanced against personal possessions of the borrower held as collateral. Though they existed in premodern society, pawnshops did not become a ubiquitous presence until the early years of industrial capitalism. Pawnshops were common in eighteenth-century British cities like London and Manchester—the cradle of the industrial revolution—but New York’s first pawnshop was not founded until 1822, and they did not proliferate in American cities until the middle of the next century. Pawnbrokers everywhere strove to make themselves instantly recognizable to persons, including illiterate ones, desperate for quick cash. In China, pawnbrokers hung a distinctive decorative staff from their storefronts; in Europe and the United States, the universally recognized symbol was three golden balls.
—“The Secondary Credit Market,”
Buy Now Pay Later: A History of Personal Credit,

An article, by Stephanire Clifford & Jessica Silver-Greenberg in The New York Times says as traditional banks tighten their services to the poor, to the less affluent, the poor are turning to pawn shops for financial services like cheque cashing and bill paying.

Clifford & Silver-Greenberg write:
As banks zero in on more affluent customers who promise twice the revenue of their lower-income counterparts, close 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.
This is true, as is the evidence that pawnshops cannot offer the same level or sophisticated package of financial services that banks do. Even so, they fill a need, a space that banks have vacated. At the very least pawn shops offer the less-affluent some level of service that they would not otherwise obtain. As for credit scores, this speaks of a future event, when poorer individuals and those with bad credit will eventually have the financial means to make major purchases like homes, cars and other durable goods. In other words, human consumption.

In an insecure economy, however, where good full-time jobs are scarce—and becoming scarcer—such abstract mathematical numbers like credit scores matter little, especially when individuals are looking to survive daily in a heartless money-driven world. A credit score—and the lengths that individuals will go to maintain it— represents how financial institutions, and the people that set its policies, are so far removed from the rest of humanity. The growth of pawn shops, however some might bemoan that situation, represents a new normal in America.

You can read the rest of the article at [NYT]