Those who look toward blockchain as a game changer, bringing old business models to a new paradigm, point toward the fact that information can be recorded but not altered. Thus, goes the rationale, security and trust are inherent parts of this digitally-driven process, with benefits accruing in the form of speedier commerce (no more paper) and lower rates charged to borrowers (aka risk premiums).
Might the pawnshop industry be ripe for transformation? The business model is thousands of years old. A customer brings an item or items into the shop, the item is evaluated, a loan is advanced — in other words, it’s a collateralized loan — and the item is kept until the loan is paid off.
The rates charged borrowers are high, as default risk is high — and the interest rates can be triple-digit percentages, annualized. Pawnshop owners? They tap into credit markets too, to be able to make loans. Among the most liquid and available items that make their way into the pawnshops, of course, are jewelry and other gold items — think of Grandma’s old necklace or the forgotten class ring rattling around in the desk drawer.
To that end, GoldMint, which operates as a Singapore-registered FinTech firm and which is part of the Russian firm KVP Group, has brought a network of pawnshops based in Moscow, Russia onto the blockchain in a bid to streamline the whole process.
The group of Russian pawnshops, collectively known as MosGorLombard, with 16 locations, roughly 50,000 customers and a loan book at $2 million, are being brought to GoldMint’s MINT blockchain operation. The blockchain connection comes in the wake of a previously existing relationship; GoldMint has been providing services, as reported by blocktribune.com, to the pawnshops, spanning gold purchasing and processing and accounting services.
The firms stated this week that the blockchain is being used to track gold jewelry making its way into the pawnshop locations. The goal is to boost transparency and help financing efforts, said GoldMint, as operations tied to loan disbursements and activities on the loans, including payments and default, are recorded through the blockchain. The transactions are verified by MNTP tokens. As reported, the mechanics are thus: The pawnshops pay a commission and a portion of the commissions (roughly equivalent to a U.S. nickel) are given over to the MNTP token holders for verifying the pawnshop transactions and for storing data on the blockchain. The blockchain itself is based on what is known as a proof of stake algorithm.
GoldMint has said that the relationship marks a milestone, as this is the first time firms in that vertical have been connected to the blockchain — and the connection spans the pawnshops, the funds and investors.
CEO Dmitry Pluschevskiy said at the time of announcement in a statement that “we believe that a pawnshop loan shouldn't be more expensive than a bank loan … this will greatly simplify and reduce the cost of attracting funding from large financial institutions and investors who are able to instantly access information such as turnover, average loan, the amount of gold pledged at the pawnshop now. In turn, this will allow pawnshops to reduce the interest rate for the end user.”
Beyond mechanics lies the process: Pluschevskiy told PYMNTS in an email exchange Thursday (Jan. 10) that the pawnshop operator evaluates the gold/jewelry being offered by the customer and enters the information into the pawnshop database, and the data is recorded onto the blockchain. The CEO stated that the data is anonymized, as data tied to the loan is not in fact transferred, such as name, interest rates or even the amount issued on the loan.
As Pluschevskiy stated, the focus on gold makes sense as other items typically pawned, such as electronics or even cars can fluctuate drastically in price.
The potential is significant, GoldMint estimates, across a market that is universal and liquid, as the gold pledged to pawnshops globally is 1.2 percent of total holdings globally, and translates into about 2,000 tons. Based on a troy ounce price of $1,250, the amount comes to $90 billion. As the GoldMint CEO told PYMNTS, “the blockchain also helps to fight deception of managers of appraisers and makes it easier to conduct an audit” of gold held in those shops.
“Most operations in pawnshops are in cash, since pawnshop customers usually need money here and now, and bank transfers take time,” the executive told PYMNTS. “Hence the problem: the pawnshop business is not transparent for banks or for auditors and lenders cannot give the pawnshops loans at low interest rates. Blockchain solves this problem. Any bank can quickly get access to all key indicators, see the history and issue a loan at a rate that is more profitable for the pawnshops. And this means that pawnshops will be able to lower interest rates for their clients.”
The typical Russian pawnshop client, he said, is a middle-class Russian citizen with a stable income who may not have enough on hand for consumption needs or working capital needs. As much as 90 percent of loans are given with jewelry as collateral, with the remaining 10 percent split between cards and antiques.
There are operational efficiencies that can be wrung from the pawnshop model in Russia, he said, as the ongoing need for collateral evaluation means that additional staffing levels add several percentage points to loans that can sport interest rates of more than 150 percent annually.
Looking Ahead and Abroad
Beyond Russia — where 11 million people go to pawnshops, per the National Financial Research Agency and Pawnshop Association — Pluschevskiy said that ample opportunity exists for gold moved via blockchain across the globe. Gold-secured loans, he said, are used by more than half a billion people around the world.
“Now we are negotiating with several large pawnshop networks, both in Russia and in South America, Asia and Europe,” he said. “This year we plan to connect several large networks around the world.”