U.S. pawn lenders see gold in Mexico

By Supantha Mukherjee and Abhinav Sharma – Analysis

BANGALORE (BestGrowthStock) – The United States may no longer be the main growth driver for home-bred pawn lenders as they have started reaping a bounty from underbanked markets, especially Mexico.

Pawn lenders are seeing growth opportunities in Latin America as these markets offer a broad customer base that still rely on the age-old mode of borrowing.

“What is so compelling about these countries is the high number of underbanked and unbanked customers,” Roth Capital analyst Elizabeth Pierce said.

“These are customers that don’t have a traditional banking relationship. It’s a cash-driven economy.”

Mexico, which started as just another opportunity a few years back, has become one of the hottest plays in the pawn-lending space and already brings in a big chunk of revenue for many pawn lenders.

First Cash Financial Services Inc (FCFS.O: ), which counts half of its revenue from non-U.S. markets, increased its Mexico store count by 21 percent to 343 in the year to March 31, while its U.S. store count dropped 10 percent to 216.

First Cash plans to open 65 to 75 pawn stores in 2010, mainly in Mexico, while peer Ezcorp Inc (EZPW.O: ) expects to open 40 to 50 stores.

“There are 20-plus million people in that market, and we think it’s underserved, especially with the large-format, full-service pawn stores that we typically build,” First Cash Chief Financial Officer Douglas Orr said.

Cash America International Inc (CSH.N: ), which entered Mexico in 2008, opened about 60 stores there last year and plans to “continue an aggressive store expansion campaign.”

Analyst Pierce believes that these companies have a minimum of five years of growth in Mexico and expects them to open nearly 100 stores each every year and still not hit the saturation point.

First Cash, whose footprint in Mexico dates back to 1998, is ramping up quickly to cash in on its first-mover advantage.

“We’ve been in Mexico for a long time,” First Cash CFO Orr said. “It’s taken us essentially 12 years to build infrastructure to support the growth.”

Cash America and Ezcorp, which were late to the Mexican party, are also aggressively investing in the country.

A pawn store takes about three years to become cash-flow positive, and becomes more profitable with time, Macquarie Research analyst Bill Carcache said.

Analysts say that though First Cash will leverage its longer presence and better infrastructure in Latin America, newer players are learning the business quickly and expanding aggressively.


Among the other countries that offer attractive opportunities to these consumer finance companies are Canada, Australia and Britain.

While Cash America is trying to grow its cash-advance operations through the Internet in these countries, Ezcorp has already made inroads there.

Cash America’s revenue from its non-U.S. pawn operations jumped 23-fold jump in 2009, while its U.S. revenue rose by just 9 percent.

Foreign expansion will help many of these lenders cut exposure to U.S. regulations that are weighing on their payday operations, Pierce said.

The payday industry has long been under the lens of U.S. regulators. Several states have already passed legislation capping interest rates, and the effect is showing on the bottom lines of payday lenders.

The interest rate caps, coupled with high unemployment rates, have pushed a number of companies with both payday and pawn operations heavily toward pawn.

However, payday lenders see a bright spot in Canada.

“In Canada, the provinces have just enacted a new payday loan regulation that clarifies the rules and the rates,” CL King analyst William Armstrong said. “So, that has removed the political risk because now the regulatory situation is settled.”


(Reporting by Supantha Mukherjee and Abhinav Sharma; Editing by Unnikrishnan Nair)

U.S. pawn lenders see gold in Mexico