The year is 500 AD. In China, ne’er do well rich folk evade taxes by teaming up with Buddhist monasteries to provide the needy with money (or fish) who leave their family heirlooms at the monasteries as collateral. Meanwhile in the Middle East, hawala brokers are helping Silk Traders transfer cash to one-another without having to move the physical coins.
These ancient systems are early examples of the types of lenders who have supported consumers through times of financial difficulty for almost 2,000 years. Today, instead of monasteries we have high street pawnbrokers and hawala brokers have been replaced by payday loan providers that offer short-term, unsecured loans, at relatively high rates of interest.
In the last financial crisis, both industries enjoyed huge growth as demand for personal credit soared. Rising unemployment combined with a deep mistrust for the flailing banks sent struggling consumers elsewhere, while poor liquidity made it hard for anyone to persuade a bank to lend them money, even if they had wanted to.
Pawnbrokers bathed in the light of the rising gold price – a typical phenomenon during times of economic distress, when investors rush to safe-haven assets. Struggling consumers pawned their jewellery in exchange for a quick supply of cash. If they failed to repay their loan, the pawnbrokers took hold of the gold which continued to rise in value.
Between 2008 and 2010, the trend was a global phenomenon. Reuters reports at the time said Russian pawnbrokers were enjoying new custom from “middle class people with more valuable gold and jewellery”. In the US, the three listed pawn brokers enjoyed strong share price rises, even as the wider market was falling.
Meanwhile, payday loan providers proliferated beyond their core working class market. Senator Elizabeth Warren – a Harvard law professor at the time – argued “as the economy has worsened, payday loans have increasingly become crutches for those higher up the economic scale”. And post-crisis, demand didn’t immediately wane, even as financial conditions improved. The ease of use of payday loan providers – a stark contrast to the ageing technological capacity of the big banks – kept huge swathes of global populations interested in borrowing from them. Wonga, for example, enjoyed a continued rise in demand until 2013 when its customer base peaked at 1m.
All that glisters
Rising demand gave way to rapid increases in profits in the consumer debt industry, leading to heady investment in further expansion. For the pawn broking industry, the added allure of a 30 per cent increase in the price of gold (in 2009) saw many companies expand into the gold purchasing industry, listed providers H&T (HAT) and Albemarle & Bond among them. Retail outlets for buying and selling gold gave both companies a new revenue stream which helped them beat both analysts’ and their own expectations throughout the financial crisis.
But the good times were not to last. Demand for short-term loans fell as the economy got back on track and improving financial health saw investors cash-in their gold profits, sending the price of the yellow metal plunging back down again. Suddenly, buying and selling gold didn’t look quite so attractive.
For H&T – whose chairman, Jonny Nichols had warned in 2009 that “current volumes [of gold purchasing] may not be sustainable” – the fall was not a problem. The group had agreed temporary and flexible pricing structures for its retail units and was able to scale down its business in line with demand. The same could not be said for Albemarle & Bond whose heady expansion left it on the hook for collapse.
Spoiling it for the rest
For the payday loan providers, it wasn’t demand that put paid to the good times, but regulation.
In the UK, horror stories from consumers left with crippling debt after using a payday loan provider drew the ire of the Financial Conduct Authority (FCA). After the regulator found Wonga’s debt collection practices unfair in 2014, they slapped the payday loan industry with tougher rules and capped their charges. Wonga went into administration in 2018 after suffering a sharp decline in profits owing to the tighter regulation and shredded image.
The regulation – which impacted the pawnbrokers offering short-term loans – was also the final straw for Albemarle & Bond. After several profit warnings, the company went into administration for the first time in 2014 and then again in 2019. Well run H&T, which has always had one eye on the future, picked up the pieces.
For investors, it is worth remembering that financial frailty will not last forever. Some industries are well placed to benefit during recession, but it is worth looking to those that have a long-term plan and are not only primed to benefit when times are tough.
