Understanding the Pawn Broking Industry (ValueMax Case Study)
In today’s article, we would be explaining how the pawn broking business model is like using ValueMax as a case study.
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ValueMax Group established their first pawn broking outlet in 1988, providing pawn broking services and the retail and trading of pre-owned jewelry and gold. Furthermore, they have an overseas presence – namely Malaysia. When first IPO-ed, the Group only had two business segments – Pawnbroking and Retail & Trading of Pre-Owned Jewelry and Gold. However, they have expanded to include a new business segments – Money Lending.
Pawn Broking & Trading of Pre-Owned Jewelry & Gold
The main business of the Group is pawn broking services. Pawn broking is a regulated and licensed form of collateralised micro financing. Pawners will pledge articles as collaterals for the loans extended. Typical pledges include jewelry, branded timepieces, gold, platinum and silver.
The retail arm of the group reconditions selected unredeemed pledged articles from the pawn broking business as well as jewelry and branded watches purchased from walk-in individuals at the outlets. These items are then sold as pre-owned jewelry. Additionally, the Group does purchase scrap gold from other pawnbrokers and jewelry traders, processing it before reselling it to refiners, retailers, factories and wholesalers.
A readily available source of credit. Pawn broking offers a readily available source of credit due to the fact that it is a form of collateralized loan that allows an individual to get a certain percentage of the value of the item pawned. Compared against credit cards, which charge rates that are much higher than the maximum 1.5% per month that pawnshops are allowed to charge, it is a cheaper source of funding too. People turn to pawnbrokers instead of banks when they are in need of short term loans, as: 1) pawnshops have no requirement for credit checks or proof of salary, 2) fast processing times.
Secured loans with items as pledge. After appraising the pledged item, an offer will be made for the item based on a percentage of its prevailing market value, which is also known as loan to value (LTV). Generally gold items will fetch higher LTVs of about 70%-80%. The maximum contract term is six months with an interest rate not exceeding 1.5% a month.
Unredeemed articles are auctioned off. After six months, any unredeemed item exceeded SGD 50 in value will be sold off at a public auction. Anyone may bid for and purchase these pledged items at the auction as long as it is above the reserved price. The reserved price, set by the respective pawnbroker who owns these pledged items, consists of the floor price (the value placed on the item at the time of giving out the loan) and the interest accrued for that respective loan. If the item is auctioned off above the reserve price, the surplus after auctioneer fees will be returned back to the pawner. Items that are not sold will be sent back to the pawnbrokers.
Items not sold in auctions. Items that were not sold will go back to the respective pawnbrokers, either to be scrapped or refurbished to be sold as pre-owned jewelry. Typically, the gross margins for pre-owned jewelry (10%-20%) are much higher compared with those in the scrapped segment (0.5%-3%)
To have a better understanding of the business flow, one may refer to the following table.
Surge in pledges yet drop in value. The number of pledges received at pawnshops increased by 57.6% to SGD 4.24 million in 2014 from SGD 2.69 million in 2008 as seen in the following table below (Table 1). However, while we see an increase in received pledged items in 2013 and 2014, we notice a fall in loans given out in these 2 years as seen in the table below (Table 2). This just means that while customers may be pawning more items, they are pawning items of lower value and there is a reduced need for loans. This trend is likely to continue due to increasing interest rates.