The holidays are typically a time when most businesses experience peak sales activity. However, the ongoing pandemic has disrupted the flow of commerce around the world. In the UK, for example, a second lockdown has forced all nonessential shops to close, allowing only delivery and click-and-collect options.
These and other financial difficulties will likely result in the closure of some businesses suffering under pandemic pressures. At the same time, many people are opting not to travel or meet in large gatherings for the holidays. For these consumers, gift cards have become the next best choice in lieu of in-person gifts.
But, observing these two trends in tandem begs the question: what happens to unredeemed gift cards in the event of a business closing? This article will explore the options available and discuss how banks can prepare for the upcoming holidays.
What Happens if a Merchant Goes Under?
When a company gets into financial trouble, it’s not always clear what happens to existing gift card balances.
In the past, some businesses have received help when another company steps in to offer credit, or even outright purchase the struggling operation. The buyer may then offer to replace customers’ gift cards, or accept them up until a predetermined date. Of course, that’s assuming that the troubled business can find that external support.
When a company ceases operations in the UK, an administrator typically becomes involved. Their job is to try and save the company, or at least conserve the company’s assets. This function might lead them to refuse to accept customers’ gift cards, and instead instruct buyers to seek assistance from their banks.
Customers may have no recourse if they purchased gift cards using cash. However, if the buyer used a credit or debit card, then the relevant card network will allow a chargeback on the grounds that the merchant refused to provide the goods or services purchased.
Filing a chargeback might be an attractive option for consumers. Unfortunately, it can become a problem for banks if the merchant isn’t able to cover the cost of the chargebacks.
Who Bears Liability?
Gift cards are available in different formats. Chargeback rules and timeframes will depend on the type of gift card purchased, as well as the card network that issued the credit or debit card used to purchase the gift card.
For example, let’s assume that the pandemic forces a supermarket chain to close their doors. This chain sold merchant-branded gift cards that were purchased at the store, as well as gift cards from third-party brands, such as restaurants and other retailers. The store’s acquiring bank would be responsible for any chargebacks on the gift card purchases, because they are the ones who initially sold the gift card to the cardholder. And, if the merchant is incapable of covering the cost of a chargeback, liability then passes to the merchant’s bank.
So, what’s the solution to this predicament? One common compromise between the interests of the bank and those of the merchant is a merchant account reserve requirement.
There are different ways of setting up a reserve requirement. The balance of the reserve can be assessed as a rolling, capped, or up-front reserve. In either case, the basic idea is that the funds available in a merchant account reserve are kept aside as a form of insurance in the event of a chargeback. It’s similar to equity required for a loan, as it can be drawn upon in the event of a chargeback to repay the consumer.
This protection only goes so far, though. If a merchant sees a sudden surge in chargeback activity that depletes their on-hand assets, as well as the funds within their reserve account, the financial burden will then fall upon the merchant’s acquiring bank. In that scenario, the bank will feel the hit on the merchant’s behalf.
How Banks can Prepare
In the event of a sudden spike in chargeback issuances for a merchant—which could happen if the merchant goes under—the acquirer assumes ultimate liability. Thus, they must be ready to deal with the fallout of such a worst-case scenario in this unpredictable climate. This is especially important when we consider the possibility of invalid chargebacks.
An invalid chargeback issuance—commonly known as friendly fraud—means expensive fees and increased overhead. While one invalid chargeback might not seem like a big deal in the grand scheme, they can cause significant damage to administrative resources if filed en masse.
Banks should ensure that they are up to date with the current network rules to prevent chargeback fees and associated losses to prepare for the coming influx of gift card purchases. It’s also important that they familiarize themselves with all current developments published by card networks, as well as local and national governments. Conditions are liable to change rapidly due to the pandemic, and banks must the ready to respond.
For issuers, it’s important to stay in communication with cardholders and ensure that they’re aware of what actions they should take in the event of an unredeemed gift card. Acquirers, on the other hand, must monitor the situation closely. They should also consider whether it’s necessary to get help managing chargebacks to deal with a potential surge in activity.
At Fi911, we’re experts on chargeback rules and section 75 claims. We can help reduce mistakes in operation, and identify and prevent false chargeback claims. Schedule a demo below to learn more.
