By Casey Hynes for Forbes
When David Margendorff arrived in the Philippines several years ago, the country’s financial system piqued his interest almost immediately. While working with a fintech startup, he became aware of the high percentage of unbanked people and what he calls the “weak consumer banks.” As an entrepreneur, he was keenly aware of the Philippines’ potential for fintech innovations and he soon found an opportunity to disrupt one of the oldest industries on the books – pawn shops.
“Since I was new in the country, I wanted an answer to the question ‘If only 2 out of 10 people have a bank account, how do they get access to a loan?’ The answer was: pawn shops,” Margendorff recounted via email.
Pawnshops have been around since ancient times, with reports of such outfits recorded in ancient Greece, Rome and China. They offer customers a chance to access cash quickly by selling their valuables or using them to secure loans. These shops are especially popular among OFW (overseas Filipino workers) families, who rely on pawnshops to redeem remittances sent from family members in other countries. However, pawnshops are notorious for making predatory loans and accepting only certain types of valuables, such as jewelry.
Given that 69% of the population in the Philippines in unbanked, pawnshops play an important role in enabling people to obtain cash and loans, since they cannot participate in the standard banking system. Selling or borrowing through pawnshops can be a time-consuming and emotional experience, especially since many require customers to come to the store in person to conduct business.
Knowing that many people rely on the pawn industry, Margendorff decided to build a better, more modern option.
‘A pawnshop in 40 million pockets’
In contrast to the number of unbanked, the Philippines has a high mobile penetration rate, with three in 10 people owning smartphones. The country has the fastest-growing smartphone market in the world, according to the International Data Corporation. Margendorff decided to leverage existing technology to develop PawnHero, a user-friendly, digital pawnshop service.
“We literally put a pawnshop in 40 million pockets,” Margendorff said.
PawnHero launched in 2015 after raising seed funding from Hatchd Digital in a round led by angel investors Manny Ayala and Nix Nolledo, both angel investors. The platform enables people to go online, list the items they want to post as collateral for a loan, and select the desired length of the loan. They’ll then receive an appraisal and PawnHero will arrange a free pick-up of the goods. Users can pawn mobile phones and personal electronics, in addition to valuables such as jewelry.
Borrowers receive PawnHero cards that will be linked to their accounts and credited once the transaction is complete. These can be used as debit cards at ATMs.
The company bills itself as an alternative to the “intimidating and embarrassing pawnshop experience of the past,” in addition to being more convenient than in-person exchanges. PawnHero also promises interest rates that are half those at traditional pawnshops. It doesn’t maintain physical locations, but facilitates pick-ups through in-house couriers.
“PawnHero charges the lowest interest rate in the country, provides a fair appraisal, and accepts a wider range of collaterals – that is a very solid value proposition – and as a result helps a lot of people,” Margendorff said.
Margendorff likened what PawnHero is doing to Uber – the company isn’t creating a new industry, but it’s offering a better customer experience than the long-accepted status quo. Although PawnHero provides a modern, more cost-effective option than most traditional pawnshops, it aims to serve a wide range of consumers – not just the unbanked.
“[It’s] not limited to those who don’t qualify for a bank loan, but also those who have credit cards but might be turned off by the lengthy application process of banks,” Margendorff said.
PawnHero operates only in the Philippines right now, but Margendorff has his eye on regional, perhaps even global, expansion. The World Bank reported in 2015 that 31% of adults in South Asia and 24% of those in East Asia and the Pacific are unbanked. Margendorff believes that PawnHero has an opportunity to help those excluded from traditional banking systems.
“Banks only capture the wealthy part of the population,” he said. “But fintech startups like PawnHero could help the poor have access to basic financial services.”
First appeared at Forbes