Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor

2. A Brief History of Pawnbroking and Commercial Check Cashing

2 A Brief History of Pawnbroking and Commercial Check Cashing A pawnshop loan is a relatively simple transaction: the broker makes a fixed term loan to a consumer who leaves collateral in the possession of the broker. If the customer repays the loan and all required fees, the broker returns the collateral to the customer. If the customer does not repay the loan by a speCified date, the collateral becomes the property of the broker and the customer's debt is extinguished. Because pawnshop loans are simple transactions , pawnshops are ancient financial institutions with a rich cultural and economic history. Check-cashing outlets also provide a simple service. A customer endorses a third party's check payable to the customer (generally the customer's paycheck or government benefit check) and presents this check to the CCO in exchange for cash. The CCO pays less than the full face value of the check; the discount is the CCO's fee for the check-cashing service. Although there are historical antecedents to this business, commercial check cashing could not exist before bank checks became a common means to pay workers or to deliver government benefits. CCOs are therefore relatively new financial institutions; the first came into existence in the 1930s. 12 A Brief History of Pawnbroking and Commercial Check Cashing 13 An examination of the historical evolution of pawnbroking and commercial check cashing indicates that the 1980s boom in fringe banking stands in sharp contrast to an earlier decline in pawnbroking and stagnation in the check-cashing industry. But there are many parallels between contemporary fringe banking and its antecedents . Under earlier institutional arrangements, for example, banks and other actors in the financial system commonly discounted checks and even currency. And although the items that people pawn have changed considerably over time, the basic operation of pawnshops and the reasons for their use have remained remarkably constant. The perceived problems addressed by contemporary laws regulating pawnbroking are also not new: governments have regulated pawnshops almost since their inception. THE EVOLUTION OF PAWNBROKING Informal pawnbroking has existed since ancient times. There are many Old Testament biblical references to loans based on pledges of personal property (Levine 1911, pp. 11-15). The earliest formal pawnshops, however, may have developed in China (Whelan 1979).1 In Europe, the earliest formal pawnshops appear to have been founded by the Franciscans of the Catholic Church toward the end of the fifteenth century (Kuznets 1933, pp. 34-35). These were not-for-profit pawnshops, known as monti di pieta in Italian or, roughly translated, "banks that take pity." The Franciscans opened them as a way to combat usury. The monti di pieta provided low-cost small collateralized loans to artisans and the poor.2 In the next two centuries, the Church, municipal governments, and independent charitable groups opened similar philanthropic pawnshops in the major urban centers of Western and Central lToday, pawnshops are well represented throughout Asia. In most countries, they are privately owned; government-owned pawnshops are, however, important in Thailand . F. J. A. Bauman and R. Houtman (1988) describe the functioning of pawnshops in Sri Lanka. Mario Lamberte (1988) studied their role in the financial system of the Philippines. Michael Skully (1992) provides an overview of pawnshop operations in several Asian countries. 2 At least one major contemporary Italian commercial bank, II Monte dei Paschi di Siena, evolved from one of these early pawnshops (Green 1991). 14 Fringe Banking Europe.3 As the Church lost influence, more and more of these were operated by municipal governments. The municipal pawnshops sought to charge low interest rates on loans and return any surplus on forfeited pledges to the customer; the surplus being the difference between the amount earned from the sale of the collateral and the amount the customer would have to pay to redeem the collateral. Where the law did not outlaw them, private pawnbrokers also existed in Europe. Although they charged higher interest rates than did the municipal pawnshops, they were used by some borrowers because they made larger loans on collateral, were more discreet, or more conveniently located. In England, not-for-profit pawnshops never took root, and private pawnshops were the rule. Their operations were, however, regulated by the government . Although very early records are incomplete, the first statutory regulation of British pawnshops was apparently imposed in 1603 (Levine 1911, p. 35). In 1784-1785, the British government established national licensing requirements...