Pawn shops don’t operate as most retailers do. They buy and sell items and their appeal is to offer rare valuables. Products can range from high-end jewelry to musical instruments.
Pawn shops offer short-term loans in exchange for prized items. Borrowers give up a possession as a collateral for a cash loan. This unconventional lending model is beneficial for those who need money fast or are denied bank loans.
As helpful a pawn shop can be, its loaning and selling methods raise red flags for banks. These shops have a difficult time finding financial institutions that can cater to their business model. Revenue can be unpredictable and more fluctuous than a standard store.
How Do Pawn Shops Make Money?
In order for a pawnbroker to start a shop, they need a significant amount of money to lend for items. Additionally, borrowers may not pay off a loan in time. To compensate for a late payment, this revokes the borrower’s right to their collateral item. The pawn shop can then sell these items. The borrower still owes on the loan.
Loans are equivalent to the value of a valuable asset. This gives customers the options to sell for cash or give up the item when they know they cannot pay back in time.
Why is This a High Risk Factor?
The start-up cost of starting a pawn shop alone lands the industry in the high risk realm. Businesses take out loans that are larger than that of a normal store.
Even a seasoned pawn shop can have a difficult time appealing to banks for services. The inventory of a pawn shop will vary and depend on what sellers bring in. Inconsistent merchandise can create erratic patterns in month-to-month revenue.
Pawn shops also run the risk of never gaining value from an item. This can come from a late loan fulfillment or lack of interest.
What Kind of Fraud Can Pawn Shops Face?
Every store is vulnerable to theft and fraud. Pawn shops have the additional concern of the legitimacy of the merchandise they buy.
There are numerous instances of people selling stolen items to a pawn shop. Pawnbrokers can be liable if they know that an item has been stolen from a third party.
Authenticating goods is becoming more challenging as manufacturers get better at creating realistic knock-offs. Pawn shops have to ensure that their staff is equipped to evaluate goods for authenticity. A failure to inspect for real gold or brands can leave shops with valueless merchandise and money loss.
Online Pawn Shops
Some pawn shops hold eCommerce platforms. These stores risk the same kind of fraud that others deal with.
This includes friendly fraud. A customer can claim that an item they’ve bought has never been received or is in poor condition. The client files a claim even if their issue with the merchandise never existed.
Why is This a High Risk Factor?
Unresolved fraud will always lead to loss of revenue.
Banks are less likely to work with a business that has a high chance of fraud. Chargebacks are refunds via credit card companies, which doesn’t come from the merchant initially. This leaves the merchant bank with a gap in funds.
Merchants and customers can be fraudster targets. Customers with compromised card information can end up with a fraudulent charge. The client can dispute the transaction so that they can get their money back. Merchants that don’t resolve these issues get hit with chargebacks.
What are Other Pawn Shop High Risk Factors?
There are additional factors that deter traditional banks from working with pawn shops.
Pawning is an age-old practice that helped shape the history of finance. The industry’s past reveals pawnbrokers who skirt ethics and prey on others.
Pawn shops and brokers attract those who don’t qualify for traditional loans. These people may not come up with the money to pay off loans in time. Some pawnbrokers take advantage of vulnerable clients so that they can keep collateral goods.
Pawn shop customers don’t have loan protections, either. Financial institutions have regulations in place to protect borrowers. Instead, pawn shops are required to report to law enforcement on transactions and customer information.
High Value Items
High value, or high ticket, goods can induce hefty chargebacks.
Pawn shops can sell luxury goods and jewelry at high prices. High value merchandise involved in a fraud case leads to a larger loss of revenue.
Additionally, pawn shops are a likely target for robbers. Security systems are a necessity for pawn shops to avoid physical theft.
Can Revitpay Service Pawn Shops?
Yes, Revitpay tailors to the needs of high risk businesses, including pawn shops. Our multifaceted service provides payment processing, accounts, protection, and more.
Our partnerships allow us to connect pawn shops with banks that specialize in the industry. Our tools and technology bring fraud prevention and POS options straight to you.
Are you ready to quit the endless search for a merchant services provider? Revitpay is a high risk merchant services provider with everything needed to help pawn shops succeed.