In the United States, there are around 11,000 ‘pawn shops’ - money lender establishments that provide informal credit. Usually they do not check credit scores but lend against collateral (typically a piece of jewelry, watches or collectibles). It is a multi-billion dollar industry. The National Pawnbrokers Association claims these pawn shops serve around 30 million in the United States - typically those with no credit scores or bad credit scores. The average transaction size is around $180 and is meant to be a short term loan.
While this may be much needed cash for customers especially since it is given without any credit checks, pawn brokers are not exactly known for trust and fairness and charge exorbitant interest rates starting from 30% per annum to as much 25% interest per month. Hidden fees also are a nuisance.
Pesto is a startup based in the United States that offers loans against collateral to borrowers who would typically have to borrow from pawn shops.
Customers apply for credit online and declare what they want to put up as collateral (typically jewelry). They can fill a quick questionnaire shown below. (example)
Once the questionnaire is filled regarding the object being put up as collateral, an estimated credit limit is shown.
The customer can choose to go ahead and apply for the credit. A prepaid QR code is generated which the customer can take to the nearest UPS. UPS packs and prints the label and the item is stored by Pesto.
The customer is then issued a Pesto Mastercard Credit card with the approved credit limit.
The customer value proposition is:
Rates of interest similar to other credit cards instead of even more exorbitant pawn shop credit
A ‘grace period’ of 21 months from date of billing to pay the loan where no interest is charged while many pawn shops (unless required by state laws) do not offer a grace period
No credit-score required for the credit line
Good Transparency with no hidden fees. Some pawn shops also charge additional fees to pay for things like storage, insurance or renewing the loan for a new term
Pesto positions itself as a good transparent option compared to pawn shops with lower credit costs and a grace period where no interest is charged.
Issuing a credit card is clever because Pesto can track the spending and can also get a merchant discount rate - MDR (which varies between 1% to 3% in the US) on the spending which is pretty much guaranteed to happen. This in turn lowers the cost of credit to the customer.
Pesto also charges a monthly fee of $3.33 as long as the card is held. If the loan isn’t paid for 90 days, then Pesto reserves the right to sell off the collateral.
All in all, Pesto seems like a good option for small emergency credit like paying utility bills or other emergencies. Pesto might initially run into high customer acquisition costs and the startup needs to solve for this.
The founder used to work at a pawnshop and has built the startup based on his experience. As mentioned in an interview with Techcrunch.
I took a job at Los Angeles’s largest pawnshop; it was considered an essential service. So I’m there every day with my mask on, helping this customer base, and what I saw fascinated me. Customers were getting a loan, and then paying it back, then getting another loan and paying it back, and doing this again and again and again. But it was never helping them build credit. It was never helping them graduate to something better than what they had just finished paying off. So they were stuck in this cycle. That’s what got me thinking: what if we could build a product that actually does reward people for paying back something? And the more I learned about credit, I [saw] the opportunity to build an asset-backed credit card where we give people access to what is, at the outset, much, much cheaper credit and get [them] out of this world of payday loans, pawnshops, [and] title loans and into mainstream financial products.
I liked the solution approach of Pesto - the card based lending helps Pesto capture the MDR. The transparency and having a grace period is very customer friendly. I also think the founder having first-hand insights about these customers by working in pawnshops adds to the appeal.