Analysis: As Banks Squeeze, Customers Turn to Online Pawn

Alternative finance firms, from credit unions to online and pawn lenders, are gaining traction as banks turn off the tap for easy cash and start charging fees for services that customers have had for free.

Some 60 million Americans -- close to a fifth of the adult population -- were under-banked or un-banked in 2009, according to the Federal Deposit Insurance Corp. That number is likely to rise as banks choke off free checking, and adjust to new rules that cut into their revenue.

Bank of America, Citigroup Inc, J.P. Morgan Chase, Wells Fargo & Co, PNC Financial, Suntrust and others are beginning to charge for once-free services, making a bank account more of a luxury to those living on a tight budget.

"Credit unions are an alternative source for the kind of services a bank provides," said Professor Lawrence White of New York's Stern School of Business.

"I'm hoping they would see the un-banked as part of their mission. That would be the most socially worthwhile thing they could do."

Credit unions, which are effectively not-for-profit co-operatives, are stepping up to offer cheaper alternatives to the short-term, high-interest loans provided by payday lenders.

Demand for short-term, small-dollar loans from credit unions rose 52 percent in the second quarter, National Credit Union Administration data showed. More aggressive selling by these unions will have seen that rise further in the third quarter.

Livonia, Michigan-based Co-Op Services Credit Union has begun a "Shred My Card" campaign offering $105 to people who open a free checking account with a direct deposit and who cut up their bank debit card.

"We want consumers to know they can fight back against big banks by saying 'no' to more fees. They should give credit unions a close look," Bill Cheney, Chief Executive of the Credit Union National Association, said in a statement.

The credit unions are also lobbying to have their business lending cap more than doubled to 27.5 percent of assets so they can better target small businesses unable to access bank funding.

NET LENDERS

Among the crop of alternative finance companies opening their wallets to cash-strapped consumers through the Internet are BillFloat, Pawngo and Prosper.com.

Online lender BillFloat, backed by Ebay's PayPal, offers a 30-day loan of up to $225 to consumers looking to pay their bills.

The service, started two years ago, has an annualized interest rate of 36 percent, making it far cheaper than payday loans, where rates can be as high as 500 percent.

"We want to be nothing like a payday loan and nothing like a bank loan," BillFloat Chief Executive Ryan Gilbert told Reuters.

He said BillFloat, which has relationships with more than 3,000 billers, including utility PG&E and telecoms giant AT&T, was seeing at least double-digit growth every month.

Pawngo.com, an online pawn lender backed by Daylight Partners, Access Venture Partners and Groupon-backers Lightbank, offers up to $1 million to small business owners with collateral -- a shift from normal pawn operators where small loans of less than $1,000 are the norm.

"We helped a gentleman who needed money to put into his venture fund. We loaned him $50,000 on several pieces of jewelry and normally he would have gotten that from a bank, but the banks just aren't there for those loans right now," said Pawngo CEO Todd Hills, a 25-year pawn industry veteran.

Pawngo, which has offered pawn loans on Louis Vuitton bags and Solitaire diamond rings, is attracting better-off clients, who have seen banks pull back their lines of credit.

Peer-to-peer lending site Prosper.com, which has raised more than $70 million in venture funding, connects people who want to borrow money with those who want to invest. It has more than $262 million in funded loans since it launched in 2006.

The growing demand for newer financing options is attracting venture capitalists, who are backing new, Internet-based entrants.

LOOKING TO LIST

Demand for these services is also spurring alternative financial firms to tap public markets for the cash they need to grow.

Regional Management Corp and Community Choice Financial have filed for initial public offerings this year, and Cash America said it would spin off its online lending unit, Enova International, in a $500 million IPO.

Investors are likely to buy into these IPOs, despite the regulatory overhang, as these companies are immensely profitable.

"These companies could make a unique industry cluster in the IPO market; they have revenue, they make money," said Josef Schuster, founder of Chicago-based IPO research and investment firm IPOX Schuster.

Other listed pawn and payday lenders like EZCorp, First Cash Financial, and DFC Global Corp have bolstered their pawn lending operations and are adding pre-paid debit cards to the services they offer.

(Reporting by Jochelle Mendonca and Sharanya Hrishikesh in Bangalore, Editing by Anil D'Silva and Ian Geoghegan)