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Part IV - Gift card administration

Date

Some gift card administration practices have raised the concerns of some consumers and consumer advocates. These concerns are differentiated from those associated with gift card terms and conditions as they relate to how consumers are affected by the way in which gift card programs are managed, rather than their terms of use. Issues relating to gift card administration are not easily resolved. While some issues about terms and conditions relating to gift card programs can be resolved through more effective disclosure; issues about gift card administration are related to the processes that contribute to their operation and product design more broadly.

Lost, damaged or stolen cards

The consultation process undertaken by CCAAC did not reveal significant concern in the community about how traders deal with consumer concerns where gift cards are lost, damaged or stolen. However, some consumers have made complaints to ACL regulators where gift card issuers do not replace gift cards. Gift card issuers often do not maintain a record of who has been issued with a gift card. Maintaining such a record may be further complicated where gift cards are passed on as a gift. It is noted that gift card issuers normally replace faulty gift cards that are presented by a consumer76, however, it is not universal practice to replace lost or stolen gift cards. While some businesses are able to replace gift cards for consumers who can provide proof of purchase to identify a lost card, the costs of replacing lost or stolen gift cards may mean that other businesses are unwilling to do so.

Where this applies to damaged gift cards, there may be cause for further concern. Under existing law, consumers should be able to expect gift cards that do not work on arrival to be replaced promptly with minimum fuss. In this regard, gift card issuers should ensure that facilities are available for consumers to have cards replaced. This includes maintaining records or systems that allow the issuer to replace a gift card when presented with one that does not work. From the submissions, it would appear as though gift card issuers are generally able to replace gift cards through a serial number that is provided on the gift card or by providing proof of purchase.

A related concern is where a gift card is not processed correctly at the point of sale. Where this occurs, any serial number is unable to be used to replace the gift card. As with other products, where the gift card holder is unable to provide a proof of purchase, there is a risk that consumers would be unable to have the gift card replaced. Due to the risk of fraud, many gift card issuers would refuse to replace gift cards without a proof of purchase.

Maintaining records

It appears that most gift card issuers record information specific to the individual cards issued. Typically, at a minimum, this includes the amount of store credit contained on the card and the expiry date. This information is usually recorded for the purposes of facilitating gift card transactions. While information management systems may be capable of recording a richer set of information, including the details of the gift card holder, it may be practically difficult for this information to be recorded at the point of sale. Without collecting information from the consumer at the point of sale, the gift card issuer would be unable to verify the details of any lost or stolen gift card.

Practical approaches to replacing lost or stolen gift cards

It has been suggested that businesses selling gift cards could offer a personal registration number so that gift cards can be easily replaced if lost. However, as discussed, gift card issuers may not record the purchaser's details when issuing the gift card. Recording such information may also be an impractical measure if one customer buys several cards to give to different people at Christmas.

CCAAC considers that, where possible, gift card issuers are generally willing to work with consumers to replace gift cards where it is practical to do so. Consumer concerns about the replacement of lost, damaged or stolen gift cards appear to arise because, in some circumstances, it is not possible for the issuer to cancel the misplaced gift card or to know what value a new gift card should be issued with. In these circumstances it may be useful for the purchaser of the gift card to pass on the receipt or other proofs of purchase to the recipient.

Findings

There are some practical difficulties for issuers seeking to replace lost or stolen cards. CCAAC is of the view that compelling issuers to maintain detailed records could be too costly to issuers and may have flow on costs to the consumer. Issuers that facilitate replacement cards where possible do so to the benefit of their customers. CCAAC interprets the current law as requiring issuers to replace cards that are damaged on arrival where a gift card holder can provide evidence of the purchase.

CCAAC is not convinced that this issue warrants the introduction of any kind of new record keeping requirements. However, CCAAC does believe that as a matter of good business practice, issuers should assist consumers to replace lost or stolen gift cards wherever possible. CCAAC notes that some gift card issuers encourage gift card holders to keep a proof of purchase or take note of any serial number so that they can have it replaced in the event that it is lost or stolen. While this may be possible for some gift card programs, CCAAC acknowledges that this may only be appropriate where the risk of fraudulent activity can be managed appropriately.

Furthermore, gift card holders are likely to benefit where the gift card purchaser provides them with a proof of purchase to assist them in replacing lost, damaged or stolen cards.

The use of unspent monies and interest accumulated on gift cards

There have been some suggestions that interest accumulated on unredeemed gift card balances be transferred back to consumers. This issue raises questions about what consumers can expect when purchasing gift cards as well as what benefits they are capable of providing.

While some gift cards are regarded to be financial products, they are not investment products. Gift cards that are financial products are considered so because they are a non-cash payment facility. There are currently no laws enacted in Australia that compel those who collect deposits, to provide an investment return to the consumer. Indeed it is not uncommon for transaction accounts held at financial institutions to offer near zero interest rates.

With the exception of a few open-loop gift cards, most gift cards are not offered by financial institutions. Gift card issuers are typically retailers that market and sell consumer goods or services. While gift card issuers may make a return through gift card breakage, CCAAC is not aware of any evidence suggesting that gift card issuers make a substantial return on interest earned on unclaimed monies.

Gift cards as a set of terms and conditions

Where a gift card holder does not redeem a gift card, whether due to an expiry date or otherwise, the amount paid for the gift card is not usually refunded. This understandably causes some consumers to express concern that they have not received value for the money paid for the gift card.

Gift cards do not function like transaction accounts. Where gift cards are promoted as being for a particular dollar amount, consumers may interpret this as meaning that the gift card holds a monetary value. But when consumers purchase a gift card, they are in effect purchasing a set of terms and conditions that will allow them to acquire an amount of goods or services from a retailer. Consumers are typically unable to exchange a gift card for money and they must redeem t
he gift card in accordance with its terms and conditions.

Abandoned property laws

Some submissions have suggested that unredeemed gift card balances should be treated similarly to other unclaimed moneys and should be remitted to the state.77 This is commonly referred to as 'escheat'.

Escheat is a common law doctrine that developed out of feudal law. It ensured that when a landowner has died without an heir, the land could revert to the feudal lord (and later the state). This approach was adapted to apply to bank balances, where the owner of the account could not be located. If the owner was subsequently located they could reclaim the appropriated money from the state.

Provisions in the Banking Act 1959 regulate unclaimed moneys held by authorised deposit taking institutions.78 Unclaimed money is also regulated using context-specific regulation, for example, the Commonwealth Superannuation (Unclaimed Money and Lost Members) Act 1999. Several states and territories have generic legislation concerning unclaimed money.79 State regulations usually determine money to be 'unclaimed' if it is held in an account without being operated on for a number of years.80

It is not immediately apparent how generic state unclaimed money laws apply to gift card balances because of difficulties reconciling gift card balances with the definition of 'money' in these acts. Gift cards are in essence a bundle of contractual rights and may not easily fall within the definition of money.

Alternative gift choices

In terms of useability, gift cards may in many ways be a poor alternative to an equivalent amount of cash. Cash does not have an expiry date, and it can be used at almost any retailer.81 But gift cards are not cash and should not be promoted as being another form of money. The secondary market for gift cards may offer consumers with the opportunity to sell their gift cards at a market price, but this is quite different to a consumer using a debit card to take money from an ATM. Accordingly the principles of abandoned property do not easily apply to gift cards. A gift card typically provides the holder with the right to redeem a particular gift card within a particular period and its value becomes negligible after this period has passed. Therefore applying the principles of unclaimed property may not provide consumers, or otherwise, with any practical benefit.

Unspent monies

There are a number of issues that arise even if the principles of unclaimed property were applied to gift cards. These include the fact that a transfer of unspent moneys to the state would not benefit consumers directly. Any mechanism that would allow consumers to exchange their gift cards for cash may discourage gift card issuers from issuing them as they may cease to benefit from the sales generated through their use. There may also be cost implications to retailers if they were required to account for unspent monies and pay them to another entity.

Consumers who wish to avoid the risks associated with gift card products may be better served by choosing alternative products. Where consumers purchase gift cards for purposes other than gift giving they may be better off using flexible deposit or transaction accounts offered by financial institutions.

While CCAAC is unaware of any appropriate remedies to address consumer concerns about the use of unspent monies, gift card issuers may be in a position to better educate consumers about any terms and conditions that apply. In this regard, issuers could explore how more effective disclosure could be achieved and should ensure that promotion strategies are consistent with the true nature of the products offered.

Estimating gift card breakage

Estimating gift card breakage is no easy task. While it may be possible to obtain data relating to the breakage rates of some individual gift card issuers, it is difficult to estimate this across the industry. From industry estimates and data, it would appear that the level of breakage in the Australian market is below 8 per cent, but above 3 per cent.

A discussion on breakage is relevant to the extent that policy options could assist in reducing breakage rates for consumers. Breakage can be the result of consumers losing or misplacing a gift card, being unable to redeem it before an expiry date, or failing to redeem remaining balances before expiry. Extending expiry dates, for example, may assist the subset of gift card holders who are unable to redeem their gift card just after expiry. However, many gift card issuers offer grace periods or will replace a gift card where a customer has made a complaint, irrespective of how long it has been expired for. These policies may not necessarily be captured in reported breakage rates.

It would appear as though a majority of gift cards issued in the Australian market that go unredeemed are lost or forgotten about by the gift card holder. These consumers are more likely to benefit from messages that encourage them to use their gift cards as soon as possible rather than holding them for later use.

Findings

Gift cards are not intended for investment purposes and gift card issuers should not be expected to transfer interest payments to gift card holders. While the transfer of unredeemed balances to the gift card issuer may be seen as an injustice to the consumer, it is unclear how these concerns can be resolved. Allowing consumers to 'cash out' gift card balances could lead to significant consequences for suppliers of gift cards and it is not clear how applying the principles of abandoned property to gift card balances will benefit the gift card holder. Gift card issuers should encourage consumers to redeem their gift cards as soon as possible.

Gift card holder rights in the event of insolvency

Issues relating to terms and conditions in the event of insolvency were discussed in Part III. In addition to these issues, gift card holder rights in the event of insolvency have been presented as an issue for some consumers.82

The Issues Paper noted that if a gift card issuer enters insolvency, gift card holders will ordinarily be classified as unsecured creditors. The claims of gift card holders will then rank alongside all other unsecured creditors of the company. Sections 555 — 563AAA of the Corporations Act provide for the priorities of creditors' claims in the winding up of corporations.83 In a winding up, the interests of unsecured creditors (including gift card holders) are subordinate to a number of other interests, including claims by secured creditors, the costs associated with the liquidation and wages owed to former employees.84 As a result of this low ranking, gift card holders will often receive only a fraction, if any, of the total value of their claim.

Some consumers may be able to obtain practical redress by applying for a credit card 'chargeback'. This is a process whereby the gift card purchaser's bank, on the gift card holder's behalf, can apply to have the credit card transaction reversed. This can occur where goods or services have been paid for, but not supplied.

For other consumers, it was suggested that gift card holders could be protected from the insolvency of card issuing retailers through the establishment of a trust fund to hold gift card balances. It is claimed that this would ensure that even in the even
t of insolvency, funds would still be available to honour gift cards. It would also ensure that gift card issuers do not rely on money received from gift cards sales for other purposes, until the gift card has been redeemed. However, such an approach would necessarily reduce the working capital available to the entity while it is solvent, as well as reduce the amount available to meet the claims of all other creditors in the event of insolvency, effectively transferring welfare from one group of creditors to another. Such an approach could also be expected to increase the cost of operating a gift card program.

A similar approach proposed in submissions was to assign a higher priority to gift card holders in an insolvency process. Such an approach would have significant impacts on businesses, lenders, investors and employees, and place gift card holders above all other unsecured creditors, such as contractors or trade creditors that had supplied goods or services to a company without payment. There does not appear to be a compelling case for why gift card holders should receive a higher priority than other unsecured creditors of the gift card issuer.

Findings

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.


76 Myer, p3.

77 Shane Allen, p 1.

78 Banking Act 1959 (Cth) s 69 (11A).

79 Unclaimed Moneys Act 1950(ACT), Unclaimed Money Act 1995(NSW), Unclaimed Moneys Act 1891(SA), Unclaimed Moneys Act 1918(Tas), Unclaimed Money Act 2008 (Vic), Unclaimed Money Act 1990(WA). Public Trustee Act 1978(Qld) Pt 8, Companies (Unclaimed Assets and Moneys) Act 1963(NT).

80 For example, NSW requires an inactivity period of 6 years. Unclaimed Money Act 1995 (NSW) s 7.

81 Although some retailers, including those that operate through online platforms may not accept cash payments which may to some extent explain why consumers purchase some open loop gift cards.

82 For example, Judith Powell p 1, Laura Lindley p 1, Phillip Lane p 1

83 Corporations Act 2001 (Cth), s 555 – s 563AAA.

84 Corporations Act 2001 (Cth), s 556.