This is a transcript of David Kuo's podcast with Paul Aitken of Borro.com.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today we are delighted to welcome Paul Aitken, the Chief Executive of Borro.com to the studio. Welcome.
Paul:
Hi there, how are you?
David:
I'm good, I'm very good. Before we sort of kick off this podcast I understand you're a Liverpool fan.
Paul:
Absolutely.
David:
Okay and I'm a Chelsea fan.
Paul:
That's going to be an interesting next twenty minutes or so!
David:
We're not going to let it affect the podcast in any way are we?
Paul:
Okay!
David:
You're here today to talk about the pawnbroking industry.
Paul:
Yes.
David:
And, I think one of the first questions anybody asks whenever we talk about pawnbroking is where did it start? When did it start? How old is the industry?
Paul:
Well, it's a very old industry, it's actually the oldest form of lending, it has its roots in ancient China, and it's been very popular throughout the ages. I guess, in its simplest form, if you need money and you own something of value; it enables you to release money from that item of value. Prominent examples of people using pawnbroking in history - Queen Isabella of Spain pawned her jewels to fund Christopher Columbus' voyages to the new world.
David:
So who did she take it to?
Paul:
I'm not sure of the detail on that, you know, I wasn't around at the time so it's pretty well recorded in history that's what happened. It went through up until about Dickensian times, the mid nineteenth century, where there was pretty much a pawnbroker attached to every pub in the country, and the depression in the mid twenties through to the seventies you saw the number of pawnbrokers really, really diminishing, down to about 50 at the end of the seventies.
David:
It's interesting you sort of bring in those two things. I mean you talk about the Dickensian industry, you talk about the depression, we don't have a Dickensian industry now, a Dickensian era, nor do we have a depression, so why is pawnbroking still so popular?
Paul:
Well I think that what you found is that pawnbroking regressed right down to 50 shops 30 years ago and it's grown twenty times since then so there are now a thousand shops. I think the bottom line right now, in terms of why it's popular, is that people's access to more traditional forms of credit, namely access to bank overdrafts or credit cards have been severely diminished. Banks just aren't lending.
David:
That explains it now but it doesn't explain it say ten years ago when we still have a very strong credit industry and yet pawnbroking didn't get wiped out did it
Paul:
No it didn't but the base of only having 50 stores was very minimal. Even now, with 1,000 stores, ten years ago there were only 500 in the country, if you compare us to the United States where there's over 13,000, if we had the same level of penetration in the UK there would only be about 2,700 in the UK. So, in terms of looking at more mature markets in pawnbroking like the US we've still got a long way to go to reach the point where we still have the same level of saturation on the High Street.
David:
So how does pawnbroking actually work? I mean say, for instance, I want to pawn this bracelet that I have, what do I do if I want to pawn this piece of jewellery?
Paul:
With us you'd come to our website, Borro.com, and you'd provide us with some information on the item, the carat of the gold, the weight, and we'd be able to give you an indication of what we could lend. We then send you a pack that comes through your letterbox, and in that pack you've got a prepaid courier pouch, which is insured up to £30,000, so we've got real big levels of insurance.
David:
That might just be enough for this bracelet.
Paul:
Absolutely, I mean it looks pretty expensive actually, but basically, you then take that to the local post office and you use the special delivery courier service that the post office has. It's guaranteed to arrive with the next morning, we do the final appraisal, we give you a final quote in terms of what we can lend. If you accept you accept your contract online, provide identification details on line because we have to take two forms of ID from you and the money is wired straight into your bank account. It's very, very simple.
David:
What you've actually done is take away the embarrassment of people going into a pawnbroker.
Paul:
Absolutely.
David:
I have been past some pawnbrokers and in fact, the first recollection of the pawnbrokers was in Macau out in Hong Kong, where there are loads of pawnbrokers, simply because it's a gambling industry in Macau, people lose their money and then they have to go and pawn their watches and their jewellery. So, what you've done is take away that embarrassment but do you think there is still a stigma attached to people going into pawnbrokers?
Paul:
I think there is, absolutely on the High Street. I mean I think that most pawnbrokers are located in the more downmarket parts of towns, that's just a fact. I think that in a number of cases the shop fronts aren't that appealing, but I think there certainly is a stigma, but that stigma is becoming less.
David:
Why do you think that then?
Paul:
I think it's just a fact of the function of the pawnbroking industry has done a lot to become self-regulating, to have very transparent terms and conditions, more transparent than if you're getting a bank loan, believe me. It's a very simple transaction and I think we're a society that's becoming more trading based anyway. If you look at what's happened in the last fifteen years with the birth of eBay and the like, there's a lot more trading going on and pawnbroking, there is a little bit of trading, people do want to shop around a little bit so I think that's another element.
I think it's down to choice, I mean people's choice of where they go to get money now is less than it was two or three years ago, so people are being kind of, not forced, but it is an option that's available, they're exploring it more and they're realising it's not as bad as people's initial perception, but there is still that stigma. I think where Borro.com comes in is that we are completely removing that stigma, people do this from the comfort of their own home, no-one even needs to see them go anywhere near a shop front, and the other element is we're just convenient, because while there's only 1,000 pawnshops on the High Street in the UK we can service everyone.
David:
So in fact I don't need to go in wearing a false beard and moustache.
Paul:
Absolutely not.
David:
I can just sort of do it ...
Paul:
Just when we're doing your ID, don't do the false beard and moustache.
David:
Now you touched on, a few minutes ago, about the types of people. I mean the types of places traditional pawnbrokers open their shops, it was where the low-income people were, is that still the general trend that mostly the less well off people go to pawnbrokers or are you seeing a wide range of people of various incomes going in.?
Paul:
Well I think if you look at where the High Street is and by communicating what happens on the High Street you'll understand where we fit in. The vast majority, 99% of the shops in the High Street, are servicing the lower end of the market. They'll claim to have higher-end customers and they will have some, but it's predominantly around people who don't have overdrafts, don't have credit cards, that's kind of the core who they're servicing. Then you've got a handful of very high-end pawnbrokers who are located in places like Chelsea, Bond Street, nice parts of Manchester, they're servicing …
David:
Are there any nice parts of Manchester, you being a Liverpool fan?
Paul:
Being a Liverpool fan clearly, nice parts of Liverpool, near Anfield there's nice kind of high-end pawnbrokers who are really doing loads against fine art, very, very luxurious watches, diamonds, and these are for very asset-rich people, but cash poor. They have a short-term issue, typically they're waiting on the sale of another asset, be it a business or lots of shares or property and they're quite prolific users of pawnbrokers.
Now there's only a handful of those, we kind of fit right in the middle between the two, and what we're aiming to do is to service all customers with our product line, so we have customers who are the traditional, mainstream High Street users who will come to us, and we also have some very, very high value, high net-worth individuals who use our services, but most importantly we're tapping into a part of the market that has never used this form of lending before, and it's really kind of the eBay generation, middle England basically, people who fifteen years ago who would never be seen dead taking their fridge to the corner secondhand store, happily trade their fridges on eBay, buy cars on eBay, happily buy secondhand school uniforms which they never would have done fifteen years ago, that's where our core customer is.
David:
Are you saying most of your customers will eventually redeem their pledge then?
Paul:
Absolutely, our rates on redemptions are around 90%, the industry as a whole is just under 85%, and this is one of the myths people have of the pawnbroking industry. The pawnbroker does not want to get their hands on your goods. Why? Because if they do that means you've defaulted. If you default you're less likely to be a repeat customer, and like any good business, the pawnbroking industry wants repeat customers. It's absolutely fundamental for us to be hitting at least 90% redemption rates, we want repeat customers. We're absolutely a lender, we're not a retailer.
David:
But don't you sometimes think, when somebody brings in that really nice gold Rolex watch, and you think, "I hope he doesn't come back and redeem that because I really do fancy that"?
Paul:
I can't say that I've ever had that feeling except for that nice cardigan I was telling you about, that we received, which someone accidentally sent it us rather than sending it to their grandson, but most valuables you see, you know you can find other similar ones. The reality is though, if someone defaults, what happens is we have the right to sell the item, we never own it, we have the right to sell, we have to sell through public auction to prove the price and we're allowed to claim back what we've lent back, the interest we're owed and a small admin fee, we obviously pay the auction fees, but any balance has to be returned to the customer anyway.
David:
I didn't know that! I thought you kept the proceeds.
Paul:
No, absolutely, no you don't. You have to return the excess proceed to the customer and that's one of the other things that, I guess, people don't fully appreciate about the industry. Now I don't think the industry as a whole would say they're that efficient at doing the disposal, if you like, after someone's defaulted. One of the things we're certainly doing is being much quicker than the High Street in terms of finding ways of disposing, if you like, so that we can return any excesses to the customer.
David:
So, what's the most expensive thing that somebody has brought in or rather sent through to Borro.com?
Paul:
Well in terms of things that get sent through the couriers for example, we've had Patek Philippe watches, lending £7,000 or £8,000 against it that are worth £15,000 or something like that, £13,000 to £15,000, we've had a number of those. We get Rolexes and very expensive, what we term very expensive jewellery clearly on a daily basis. We've done a loan against a Henry Moore sculpture that was worth well over £100,000, we've had fine art loans for collections that are in the low hundreds of thousands of pounds.
We've done loans against seven carat yellow diamonds, fancy yellow diamonds and fancy yellow is a very, very expensive diamond, those are worth hundreds of thousand of pounds as well, but that isn't the core of what we do, the core of what we're really doing, if you're asking what is our typical loan, it's someone with an Omega watch, or Rolex watch, or Cartier watch, or someone with a one carat diamond ring, that's the core of what we're doing and that's typically loaning anywhere between sort of £500 and £1,500 for those types of things.
David:
Has anyone brought in a car?
Paul:
We've done loans against cars. It's something we do but the market for that service isn't that great because our model is that we take the car and put it into a secure storage facility where other high-value cars are stored, so we're not really doing loans on anything that has a forecourt value of less than £25,000, and clearly the person has to do without the car so it really means you're really into a luxury car …
David:
You could rent it back to them couldn't you?
Paul:
We could do but there are reasons why we take it into … We don't want to become people who - there are companies out there who will give you loans against your cars, called "logbook loans" and the default rates on those loan are very high, we're not, as a business, into doing debt collecting, we just don't want to do it. It's easiest for us to do the transaction up front, it's very transparent, if someone does default they know what's going to happen, we sell the assets and they get any excess proceeds back. It's a cultural thing, it's just I don't want to be really doing those types of things as a business.
David:
Okay, maybe I'm a very simple soul, but I just think if I can't afford to keep the car or I can't afford to keep a ring for instance, how do you sell it? Do I just go, "Right, I'll be shot of it" and then at least I'll have the money and I can do whatever I want to with it, other than to pawn it and have to go back and redeem it later.
Maybe it's just me, but the people who are listening to this podcast will be saying, "We've got some quoted companies on the stock market at the moment, we've got two, Albemarle & Bond and also H&T." Now they're saying what is the outlook for the pawnbroking industry? What in your view is going to happen to the pawnbroking industry?
Paul:
Well I think that what you'll see is a doubling of the industry in the next ten years.
David:
So how many have we got now?
Paul:
1,000 shops, there'll be 2,000 in ten years and I think that the online approach that we're pioneering will become a big part of the industry as well.
David:
Is that bad for you, more competition?
Paul:
Well I think competition is good when you're setting out to do something new, it always helps if you've got competitors around. Some will succeed, some will fail, I back us just to do a better job than anyone else, and actually, competition will ensure that we're continually on our toes offering the best deal that we can for our customers, and that's the same in - you don't want industries that don't have competition. If you do the customer doesn't get a good deal, so for us it's important, I think for the industry it's important there's good competition.
David:
Is it a very fragmented industry?
Paul:
Yeah.
David:
Are there lots of one-man bands out there?
Paul:
There are, there's 1,000 shops in the High Street, Albemarle & Bond and Harvey & Thompson together have just over 200, and then there are a couple of other chains that have 30 or 40 in them.
David:
The Australian one, Cash Converters?
Paul:
Cash Converters I don't actually put into that bracket because they're more of a sale or return kind of business. I don't include those in the 1,000 and they're not included in the 1,000 in the stats you hear, they're in addition. There's like the Money Shop for example, so I think what you've got is you've got a lot of single man shops, you've got two or three in a chain kind of shops, there are a number of those around the country.
I think what we'll see is there will be consolidation of those guys, there's no doubt about it, and I think that you'll see the Harvey Thompson's and the Albemarle & Bond's growing aggressively on the high street, they'll look to open 20, 30 shops a year I guess for the next few years, and that's what they should be doing, that's what they do really, really well, and for us, we already have a loan book equivalent of twelve to fifteen shops on the High Street and that's very, very quickly in nine months since we launched.
I think within a year we'll have the equivalent loan book for 40 shops on the High Street. The advantage of our approach is that we do everything in the middle, we're an online business, and one of the reasons why we scale up so quickly is because we're able to offer a deal that the guys on the High Street just can't offer. We lend more than anyone, we lend 50% of the asset value, the guys on the High Street are typically lending 30, we'll look to push that up over time.
We don't want to push it up so high that default rates go up, we want to maintain that at the right level, and we're lending against the broader range of assets, so all of our expert valuers are hired out of Christie's, Sotheby's and Bonds, all the big auction houses and the High Street guys just can't afford to do that, so it means we more accurately appraise the assets, give people a very, very up to date and accurate view of what they have, what it's worth, that's kind of what we're looking to do, and I think that approach is enabling us to grow very quickly and make this a very acceptable and very accessible way of solving short-term credit issues.
David:
So, is your industry in any way affected by the Bank of England interest rates? I mean the interest rates you charge on a monthly basis, is that affected by the Bank of England rates?
Paul:
I think there is an impact there, and clearly if interest rates go up we will need to consider whether or not our rates go up, but at the moment the Bank of England rates are so close to zero that you'd argue it doesn't have too much of an impact.
Our rates, if you look at what our rates - on average we're on about 4½% a month, whereas the High Street is probably about 8% to 9% a month on average, but our average loan value is six or seven times higher than the High Street, we're sort of £900 to £1,000 and the High Street is £120 to £150 range, but the reason why the interest rates are what they are is because it incorporates all element of the costs.
There are no early redemption charges, there's no set-up fees, that's one piece that you get with a lot of bank loan type transactions where you get charged for those types of things, so our interest rate includes all of those things. With us, it also includes the cost of the courier; it includes all storage or valuation costs and obviously, our costs of financing because we have to pay for our money.
So, I think in time there may be scope for us to bring those rates down slightly, and I think one of the things we're looking to do is launch longer-term loan products. At the moment, all of our loans are six months, but why not have a twelve or 24-month loan product, we'll be looking to launch those in the future, and that'll enable us to bring our rates down as well.
David:
Now if somebody listening to this podcast today says, "I've just been made redundant and maybe I fancy going out being a pawnbroker" how much capital would he or she need in order to start being a pawnbroker today?
Paul:
There are two bits of capital you need. Obviously, you need one bit to fund your operations and acquiring customers, your marketing basically, and if you're doing it online you need quite significant amounts of cash basically, and we're lucky, we've got investors who have backed, game changing business like Lovefilm, LinkedIn, Facebook who have a track record in supporting businesses growing.
The other bit of capital you need is money to lend, and that's the tricky bit. One of the restrictions the industry as a whole has had in growth has been access to the capital required to lend. A lot of those one or two or three-man person shops, small chains, they're using their own money to lend out, they don't have access to much bank credit to lend out, and that's a natural restriction how fast they can grow.
David:
So are we talking about say a couple of hundred thousand or less or more or …?
David:
Well to do an online business like this we're talking millions, many millions of pounds.
David:
Good grief - okay, and the other thing of course is, you mentioned earlier on in the podcast, the amount of gold jewellery and things you take in, now surely gold will have a huge impact on the profits that you're going to be making, so what is your outlook for gold?
Paul:
The first thing to say is it doesn't have a huge impact on the profits we make because we don't have a retail part of our business. If you look at the Albemarle & Bond and Harvey & Thompsons the reason why gold pricing is important for them is because they also buy gold off of people.
We don't do that, our proposition is very clear, we're a lender, we're not a retailer, it's a bit more blurred for the guys on the High Street, but for outlook in terms for where gold pricing is going to go I think there are two schools of thought. There's one school that clearly says it's over-inflated, it's gone up a lot over the last eighteen months, they can't hold for much longer, there are lots of businesses who have taken advantage of increasing gold prices and maybe those businesses need to make sure they don't over-extend themselves and don't cause themselves problems if it starts to edge down.
There's another school of thought that looks at historical gold prices and I point to the fact that at the end of the seventies and the early eighties, if gold pricing was to track to those levels it would go up from £900, £1,000 today up to £2,500. so, I don't have a crystal ball, I'm not a gold expert, but I've just shared with you two schools of thought, who knows which one's going to pan out?
David:
So what you're saying is it doesn't really make a great deal of difference to your business whether or not gold goes up or down?
Paul:
No, I think the only difference it makes is for our customers. If gold pricing goes up, we can lend more. If gold pricing goes down we can lend less because the value of those customers who have gold assets, gold jewellery, does move in line with the gold markets, but in terms of our profitability, it doesn't really have an impact because we're not buying and selling people's valuables, we're only providing a loan against them.
David:
I'm surprised you haven't got a crystal ball because I'm sure somebody must have tried to pawn a crystal ball.
Paul:
We haven't had that yet actually, no we haven't!
David:
What's the most unusual thing that somebody's ever brought into you?
Paul:
Well, I told you about the cardigan.
David:
Tell me about the cardigan again.
Paul:
Well the cardigan, we just think some old lady accidentally sent us a cardigan for their grandson and their grandson probably got a bagful of gold, so who knows whether or not - she got the cardigan back from us, but whether or not she got the gold back, I don't know. We've done quite a lot of interesting things, going onto the Liverpool theme; we gave someone a loan last week against a centenary, 1992 gold Liverpool watch.
David:
Wow!
Paul:
Yeah so, that was quite a cool one.
David:
Is it confidential or how much was that worth?
Paul:
I don't recall actually, because we're now doing so many loans I don't know the detail on each one unfortunately.
David:
I think it's slightly less than the Chelsea centenary one.
Paul:
It might be, it might be, when was the centenary, I don't know! So, I'm not sure. We've done loans against war medals, that's quite an interesting one actually, slightly unusual but what happened - and this kind of puts into perspective some of the questions you had earlier around why people are using it a bit more We had a gentlemen, one of our first customers when we started who had come back from serving in the Gulf, he had been out in the Gulf for six or seven years, I think he'd been working on fairly undercover type missions, so he didn't have a credit history in the UK, he had a building society account, tried to get an overdraft off them to support him for a couple of months while he was sorting up a new job as an electrician, and the banks wouldn't lend anything to him because he didn't have a credit history.
This guy had been serving his country for years and no provision was put in place to enable him to borrow money from traditional sources, so we actually gave him a loan against his service medals and sure enough, three months later, when he got his payment back for leaving the Armed Forces he came and redeemed his loan against his medals. I think that's a fairly unusual one. We get some fairly whacky gold jewellery coming in; people have obviously been hoarding this kind of stuff for years.
David:
It's almost antiques then is it?
Paul:
Yeah some antique stuff and also some stuff that is clearly way out of fashion.
David:
Do you find certain times of the year when people pawn more stuff?
Paul:
The peak times relate to the times of year when people have outgoings of cash that are lumpy, before the summer holidays, after the summer holidays, so we'll now go into a quiet period, end of July/August, and then get busy again in September. Pre-Christmas, after Christmas, that's clearly aligned to holiday expenditure, it's aligned to Christmas presents, it's aligned to other things. I mean September there's a rush, people getting loans to pay for school fees, for example.
David:
So that underlines the fact they are fairly wealthy people.
Paul:
Yeah, no, as I said, that's just an example. In the main our customers are getting loans for a holiday or a kid's school trip, and whatever reasons that one of their services has been switched off, Sky or something and they need to get it switched back on. There's a real mixture of reasons, we could sit there and list probably 100 different reasons as to why people would need cash quickly.
David:
But as a businessman, you don't really want to know all the knitty gritty details about why you want the money do you, or do people actually volunteer the information.
Paul:
People do volunteer it and actually it helps us understand our customers better and will help us do a better job of how we support them basically, so it is important, we don't fish for it, but people are more willing to share the situation they're in than you would imagine. I mean we had a lady the other day who wanted a loan for £400 to take her mother away to the seaside for her 90th birthday.
David:
How lovely.
Paul:
So, people are just -
David:
Did you give her more?
Paul:
We don't need to because we know we have the best deal that anyone can offer, so you have to rules, in any financial business you have to have rules on how you do things otherwise you're not going to be around long. We're about being around for a long time because we're changing the face of an industry that has evolved over 3,000 years, does a very good job on the High Street, but we think we can do a better job in the way in which we're doing it, so we have our rules.
Every now and again people try and negotiate with us and we'll go and get a second opinion because we've got lots of different valuers. If people do challenge us on the valuations we do go and get a second or third opinion from different valuation team members just to make sure we've got it 'on the button' as it were, but typically the first offer is the one that sticks and we're confident we offer the best deal.
David:
Okay, that's wonderful; I think we'll end our podcast there. Now I end each podcast with a quote, and I think I've found the perfect quote. In terms of the guy - well I don't even know if it's a guy or a girl called Everett Mámor, I think he or she might be French, and he or she says, "Money is a headache and money is the cure." Do you agree with that?
Paul:
That sounds pretty reasonable!
David:
I think it does sound pretty reasonable. Thank you very much for coming in today.
Paul:
Thank you very much.
David:
And, I wish you every success at Borro.com.
Paul:
Great, thank you very much.
David:
This has been MoneyTalk, if you have a comment about today's show, you can post it on the MoneyTalk blog, which you can find at fool.co.uk/podcast. Alternatively, you can email me directly at moneytalk@fool.co.uk.
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