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Wednesday 13 February 2013

Neither a lender nor a borrower be

Carnage on the high street continues apace.

Spare a thought this morning for the staff of clothing retailer, ‘Republic’, which has today collapsed into administration.

As with other failed retailers of late, questions are being asked as to whether customers in possession of store gift cards or vouchers will be left high and dry. For if you hold an unused gift card for a store which goes bust, the law lumps you in with all the other unsecured creditors of the defunct business and in all likelihood, there will be nothing left in the pot for you once the secured creditors have had their due.

Such is the number of retailers now hitting the rocks, that some MPs and consumer organisations have been calling for a change in the law; some even moot banning the cards altogether.

A ban seems a bit drastic. Consumers love vouchers. If you are gift giver, a voucher solves the headache of what to buy (and often times, spares you the need to expensively package up what you’ve bought and send it through the post). The gift recipient loves to have the free choice over what to buy, rather than having to take the oversized, lurid beige and purple jumper back to the shop for a refund and shops love gift cards because selling vouchers draws two customers into the shop not just one and because research shows that redeemers of vouchers end up in a great many cases, topping up voucher purchases with additional cash spend.

Of course, retailers also adore  vouchers because selling them gets them interest free cash loans, and if there is a case for reform of the voucher system, it’s here that I would suggest the reform needs to be made.

One solution would be for a store selling cards to have to place the cash price of the card on deposit in a trust account until such time as the card was redeemed. Stores might not much like having to tie up lots of tasty looking cash in this way, but there is no rational reason why they should be allowed to spend gift card purchase monies so freely at the moment. Banks cannot get away with taking deposits off customers and not having the money available to give back when the customer wants to withdraw its funds – indeed, so fundamental is this principle to the banking system, that the state guarantees that (the substantial part of)  funds placed on deposit with UK institutions will be returned.

Ring-fencing would also put a stop to a sharp, thoroughly iniquitous practice adopted by a large number of retailers of placing (often short) expiry dates on their gift cards. A period of twelve months to two years after which a card cannot be redeemed is not uncommon.  In my view, if a retailer wants to put a time limit on a gift voucher, it should only be able to do so if upon expiry of the voucher, it returns the purchase price of the voucher to the person who purchased it.

Perhaps what this discussion highlights is that the real issue with gift cards is the creation of a three way lender/borrower relationship in awkward and unregulated circumstances. Perhaps the real solution is something along the following lines instead:

Purchaser buys gift card using his credit card. The credit card is used here in much in the same way as a hotel swipes your credit card when you check-in but does not actually charge the card until you check-out. The gift card then becomes an I.O.U on the gift purchaser rather than under the current system, on the issuing shop. When the gift card recipient goes to redeem the card, the shop then endeavours to charge the gift purchaser’s credit card using the swiped details. Of course, if the gift purchaser is himself insolvent at that time or if his credit card happens to be maxed out, then the card cannot be redeemed. That might be annoying and embarrassing for the gift purchaser and the gift recipient, but perhaps that is a price worth paying in order to stop retailers from behaving like unregulated banks.

Bruce Jones

MH Corporate

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