I promise, we’ll move on from Dick Smith really soon. And I’ll spend an extra hour tonight wading through UK stocks to make sure this blog post was written on my time, not that of our investors. But I’ve been wondering about all those kids that got Dick Smith gift cards for Christmas, and the grandparents that bought it for them.
And I’ve been thinking about the banks and senior creditors who, almost certainly, very deliberately waited until just after Christmas to put Dick Smith into administration so that Grandma Elma’s money—very much intended to go towards little Bobby’s electronics hobby—is instead used to cushion the banks’ own past dumb decisions. It’s not right.
Gift cards perhaps should be operated under some sort of trustee arrangement. It would avoid issues like this.
The gift card would be branded by the retailer but issued by a bank or a central authority. When you buy the card in store, the cash goes from the retailer into the trust overnight. When you redeem down the track, the cash goes back to the retailer overnight. If the retailer goes bust in the meantime, that money is used to cash out valid cards in circulation. That money could, and should, be protected from creditors, as the business has done nothing to deserve it yet.
Interest on the cash pile could either go directly to the retailer or, more likely, be used to fund the cost of running the trust. I’m sure that if the banks don’t want to do it someone like Computershare would.
Unclaimed gift vouchers are a massive part of the upside for retailers selling such cards—apparently something like 40% of total cards gifted are never spent, what a massive gift to the retailer. Under the proposed system, the cash on unclaimed cards could still revert to the retailer on the card expiry date. Or they could do away with expiry dates. Now there’s a novel idea.
If anyone wants to offer a deposit product through the financial system, there are massive regulatory hurdles to jump through. Prepayment schemes like gift cards, however, are largely unprotected, even though they’re quite similar in nature.
It would be pretty easy to come up with a self-funding or low-cost trustee system that does the trick, whether compulsorily by law or voluntarily by those retailers keen to stand behind the creditworthiness of their gift card offerings. Hey, it might help you win Grandma Elma’s business next Christmas.
Postscript: In the absence any any scheme as suggested above, take note of point 3 in the first comment, by Ben, below.
Or… rather than going through all the inanely unnecessary administrative complexity you are suggesting people could simply:
1. not buy gift cards; or
2. failing (1) above, if you get gift card – use it; or
3. failing (1) and (2) buy gift cards with a credit card only.
In relation to (3) – if the issuer of the gift card goes bust you get a refund through a chargeback on your credit card. Your credit card provider passes the cost to the issuer’s merchant under the chargeback policies designed by Visa, Mastercard and AMEX. Who is the issuer’s merchant most likely to be? The secured creditor bank of course.
All good workarounds Ben. I wasn’t aware of point 3 before this week. And I never understood why gifters think a gift card is more ‘thoughtful’ than cash. But they do. Not sure that the suggested system would cost all that much to administer, and even if it cost more than the net interest benefit of the cash pile, that 40% non-redemption leaves plenty of capacity to pay a little something. Just an idea for the discussion table. Cheers
BTW, this system should be barely any more complex or costly than selling any other pre-paid card – public transport cards or mobile phone credit, for example. Retailers seem to manage that without too much fuss.
While point 3 is valid, it only applies for the extent of the chargeback period which is around 3 months. As most gift cards are for periods longer than that (and would want to be!), it isn’t an indefinite catch all.
Personally I don’t think people should be holding onto gift cards for that long and in all honesty the risk of being in possession of a gift card and the issuer becoming insolvent is largely a remote one (though painful if it does happen to you of course!).
It’s a wonder someone hasn’t come up with a web site that rates gift cards. There’s sites for rating just about everything else. Bunnings’ card would be my No. 1 pick. They actually sell stuff I need, the card doesn’t have a use by date (at least the one my daughter just gave me that she received as a school prize two years ago doesn’t) and I reckon Wesfarmers should be around for a while yet.
I wonder where the exposure will now lie for all the inevitable chargeback disputes lodged with card issuing banks for vouchers no longer honoured.
It lies with the merchant of the company that issued the gift card (if the chargeback is successful). It’s generally frowned upon (and sometimes looked at with suspicion) by banks providing a company with debt facilities for that same company to have transactional accounts open and actively used with other banks.
As said before – the chargeback costs, in this situation, would most likely lie with NAB. Don’t be surprised if the Administrator and Receiver aren’t exactly advertising the chargeback option to everyone…
In my opinion it is incumbent on state Fair Trading and consumer advocacy bodies to make people more aware of this
I’ve never understood how and why expiry dates on gift cards became acceptable to anyone. I also don’t understand why cash – which is far superior on several levels – is not as “socially acceptable” as inferior gift cards. Cash isn’t limited to specific shops, can easily be divided up and never expires.
Bunnings cards must be spent in one go and you can’t get change, which means that you’re most likely going to overspend.
I like your ideas about separating the card value from the retailers – but I’d much rather see “gift cash” out-compete “gift cards” and lose its stigma – as it should if rationality reigned.
I suspect gift cards would have an expiry date (likely inside of one year at best) so that, at worst, it is classified as a current unearned revenue account and the balance shouldn’t grow too large (as expiry would trigger its recognition as revenue if it hadn’t been redeemed earlier).
Happy to stand corrected on this point if I am wrong.
Bunnings give change up to $10. If the change exceeds $10 you can use it to buy gift cards.
Decades ago, there was no limit on gift cards, I once used a gift card after four years (the old paper ones) with a small sports store. I lost the gift card, then found it inside a book, when I did a spring clean. The store honoured it as they had no expiry date on them. There is no excuse for a time limit.
Gareth,
‘to make sure this blog was written on my time’ is so telling of your integrity Gareth as Forager’s appointed employee and in line with transparency, and without a shadow of doubt, it represents Steve J’s thinking with accurate reflection…
this is an opportunity to identify a valuable lesson as another salient reminder – to examine the time spent on these Dick Smith blogs, since Matt Ryan posted the first blog 29 October 2015 which received good Forager exposure [that being good, dependent on attracting long term investors]
exercise – measure the indirect value adding to Forager or a distraction from Forager’s core business of value investing for Forager’s 1,334 investors as at 30 June 2015
Hi Gareth,
I like the idea of an escrow facility.
FYI, there is a buffer of sorts in the system already, based the presence of an intermediary and the cash flow cycle, which you could exploit as part of your proposal.
Most of the time there is an intermediary who provides the distribution of gift cards, such as US listed company Blackhawk (https://blackhawknetwork.com/company/).
From my industry knowledge, here is how I think it works. Lets say you buy a $100 Dick Smith giftcard from Woolworths. The physical card was supplied by Blackhawks, and sold on consignment. The card was initially worthless, and then only later becomes valuable once activated at the time of purchase by the final consumer.
You pay $100 to Woolworths. Blackhawks books its revenue at the time of activation, on average 9.3% of transaction value, or $9.30. Ultimately 60% of the revenue, or $5.60 will finds its way back to the partner Woolworths.
Woolworths sits on the $100 for typically 14 days before paying Blackhawk (according to its 2014 Annual Report found here: https://www.sec.gov/Archives/edgar/data/1411488/000141148815000015/hawk-20150103x10k.htm, in calendar 2014 Blackhawk globally had US$527M in settlements payable / US$13,539M in transaction value * 365 = 14d).
Some 37 days later (US$1,383M settlements payable / US$13,539M in transaction value * 365 = 37d), Blackhawk remits the balance of $90.70 to the merchant, Dick Smith.
So there is a total of 51 days, being 14d + 37d, in the system between the time the card is purchased (activated) and Dick Smith being paid.
Knowing this, it irked me when Coles initially said they would not offer refunds as the money had been already passed on. That might be true, given the passage of time since Xmas, but Blackhawk would still have it, and perhaps could be leaned on for a refund.
The receivers of Dick Smith will be hanging out for this money from Blackhawk, but those cards issued over Xmas won’t be immediately available. One just needs to change the rules to allow it to be end up back in the hands of unused card holders.
Mark
Interesting Mark, I had no idea about that process. Thanks for the outline!
I’m surprised the government hasn’t got into the act to claim the proceeds of unused gift cards – it already takes ‘unclaimed’ bank accounts and super balances.
Are you advising nick Xenophon now? http://m.smh.com.au/business/retail/senator-nick-xenophon-demands-inquiry-into-dick-smith-and-gift-cards-20160111-gm34pu.html
Nick is probably not aware of this report by the Commonwealth Consumer Affairs Advisory Council in July 2012.
http://ccaac.gov.au/files/2012/10/GiftCards_FinalReport.pdf
Pretty much examined and rejected the suggestions he is making today.
The original David Jones gift “cards” were paper and had no expiry date
Following on from BEN’s suggestion…buy gift cards with credit cards and you re protected via your credit card chargeback rights.
This is true not only re: gift cards, but other forward dated transactions (i.e. anything where you pay now and get the thing or service in the future). If, due to business failure for example, you are unable to get what you paid for, you can get your $ back from the merchant’s acquiring bank.
Thought be prepared to wait a bit as the process is not always quick…as many can attest to who were in this position when Ansett Airlines went bust.
Good thinking Gareth but way too complicated.
Easiest just to make gift cards are paid out before any secured and unsecured creditors. Even before the receivers receive any money. I know that is a radical thought but quite frankly someone needs to stop this financial gamesmanship that is being played out by all the various parties.
Next best thing would be to legislate that no more heads of regulatory bodies such as ASIC can come with successful reputations in merchant and investment banking. We need more radical insights and leadership that are prepared to ‘tackle’ legal heists like this Dick Smith one head on.
So radical, and quite frankly absurd, it is very unlikely to happen.
The suggestions being floated recently would likely result in retailers deciding it is administratively easier to stop issuing gift cards or allow external providers (who offer the equivalent of EFTPOS/credit card gift cards) to take over the space). If that happens then the proposed regulations on this issue are pointless.
What’s surprising is people getting very upset about a relatively low probability default event with a small loss in the event the gift card issuer defaults on its obligations. People should also have been aware of these risks following the collapse of other large retailers since the GFC.
Why absurd Ben?
Unlikely to happen does not mean absurd.
I agree with Nick Xenophon on this one and if it legislative change that is required so be it. Directors (and management) need to be held accountable on these matters.
All too often the input on legislative changes comes from the large legal firms and I would suggest their ‘field of vision’ is not with the consumer. And we all know how proactive ASIC is not!! So, over to the pollies I reckon on this one.
Brett,
It is absurd to advocate that customers holding unredeemed gift cards should be afforded a higher priority to payment of their creditor claim than any other creditor or the insolvency professionals undertaking the external administration. There is a fixed sum of assets available for creditors – the position you are advocating is tantamount to a transfer of wealth from employee, trade suppliers, landlords and other creditors.
There are much better ways for consumers to avoid the low probability event of the default of a gift card issuer (and the small losses suffered by gift card holders in the event of the gift card issuer defaulting):
– Don’t buy gift cards;
– If you buy them:
– use a credit card to utilise chargeback options if the issuer defaults
– don’t buy retailer cards, buy ‘debit/credit’ gift cards that can be used anywhere.
These simple steps (which were also doing the rounds when Colorado, Angus & Robertson, Borders et al collapsed) would do away with the needless additional regulations Senator Xenaphon is proposing. I’d dare say one of the motivating factors in proposing them is to draw attention to his new political party prior to this year’s Federal election.
The Treasury reviewed the operation of gift cards in Australia and delivered a report on the issues consumers and others complained about with gift cards (including expiry dates, inability to cash out small balances, losing you card balance on the insolvency of the gift card issuer) in July 2012. The report (to which Senator Xenaphon did not make any submissions) considered suggestions that Senator Xenaphon is espousing and rejected them.
http://ccaac.gov.au/files/2012/10/GiftCards_FinalReport.pdf
In the report findings it noted:
‘Companies placed into external administration are required to be administered in
accordance with the Corporations Act 2001 (the Corporations Act). Gift card holders are
likely to rank as unsecured creditors in the event of insolvency. External administrators
have an obligation to maximise any returns to creditors and are not required to honour the terms and conditions applied to gift cards at the time of purchase. This may cause some confusion where in doing so, a business in external administration appears to continue to operate as normal. This may be further exacerbated where a company in external administration offers to accept gift cards under different terms and conditions than were applied at the time of purchase. CCAAC finds that some consumers have limited understanding of their rights in the event of an external administration and while
consumers are unlikely to take notice of general information on this topic, those who suffer detriment as a result of insolvency could benefit from access to clear information at that time.
‘Granting priority status to gift card holders where they are considered to be creditors
would merely transfer welfare from one group to another. Gift card balances by their
nature, are more likely to be used for discretionary expenditure. Holding gift cards on
trust is likely to be more expensive than alternative policy measures. As such, CCAAC
does not consider that gift card issuers should be compelled to maintain a trust account for gift card balances. Greater education on the risks of insolvency could be beneficial for consumers who are exposed to these risks.’
Thats helpful Ben, and somewhat persuasive but still doesn’t answer why absurd. This is why I think some radical thinking is required.
I hardly think it right that consumers provide cash (with nothing in return) to a business. They are possibly the least aware of the state of a business and I think it fair that when a person walks into a store to buy something and give them cash for a gift card on the promise of coming in later to buy goods that they should be given the highest of priorities if things go sour with the business.
I think to be cynical of Xenophons motives is hardly helpful. You could easily wipe out most people of saying or doing anything if that sort of cynical approach.
Best to deal with on basis of the merits of the discussion I suggest.
In this case of Dick Smith the gift cards issue seems more focussed because the receivers, the directors, the management, and the banks all knew of the situation with Dick Smith prior to the close of the calendar year. That to me comes across a wee bit like saying you consumers can build up our bank balance a little with nothing in return.
How many banks, let alone retailers, think that is legitimate. And quite frankly receivers always make sure they are the first cab in the rank. The poor little consumer just pays. Perhaps a cameo for how the private equity players (and that includes the ‘professional advisers’, investment banks, lawyers etc) see the retail investors in an IPO such as Dick Smith.
Legal does not make it right, and just because something is radical or unacceptable to the powers that be does not make it absurd.
Ans where is ASIC while all this is going on? Just sitting silently on the sidelines and the latest thing I read about them was Medcraft planning to attend Davos and wanting an extension on his term. Wow, when will some sanity prevail with the government (or at least with the ASIC commissioners) and ASIC that its job is corporate regulation not overseas jaunts and career building.