MAG Insights

Holidays bring joy to many – including sellers as ‘tis the season’ for sales – traditionally a LOT of sales.  One always popular gift is gift cards.  Who hasn’t bought or received one during the holiday season, or throughout the year for that matter, to recognize other celebratory occasions?  While many have joy in receiving these gifts, shouldn’t we all share that joy by selling those gifts?  Let’s hear more.

Before we get to the punchline, we need to take a step back to March 2020.  I know…it is painful to go back to that time, but it is important context.  As we all know, COVID-19 became very meaningful to all of us early that year.  We all experienced it as consumers; our favorite restaurant, local wine shop, boutique, friendly ice creamery, cafe and even our nearest mall closed down temporarily until we could step back and assess what hit the world and the way we live our lives in this new environment of risk balanced with reasonable livelihood.  Of course, retailers felt that pain even more so…a hit to the bottom line!

Retailers had to follow local, regional, state, and federal mandates for operating a retail business that were safe but also enable the sale of essentials with the convenience buyers have become accustomed to and even more so now demanded.  While all this was being vetted, some retailers were hit hard and without the ability to keep afloat had to close their doors permanently.  Frankly, it was a sad and emotional situation for us all.  The way of life was changing rapidly and the livelihood for business owners was at significant risk.

Obviously, the holiday season of 2019 had just passed and all those lucky to receive a gift card for their favorite retailer either during the holiday or even in the past to recognize a birthday, Valentine’s, wedding, or “just because” from the last 12 months were waiting to find the right time to redeem that special gift of an awesome personal buying experience for “free.” 

Yet how does someone redeem the value of a gift card if the retailer has closed its doors temporarily or permanently? Although some retailers were able to leverage their established online or mobile presence, others had to develop that presence quickly to serve their customers during this time of uncertainty.  Unfortunately however, some retailers were just unable to survive the hardship and had to close their doors permanently. 

At this point, consumers holding gift cards with value for an experience at a retailer no longer in business is in a bit of a pickle.  What recourse does the consumer have? 

Specific to gift cards received by consumers that were sold through third-party sellers facilitated by Third-Party Gift Card Providers (Blackhawk and Incomm by way of example), it is assumed that once the pandemic hit post-holiday, many credit and debit card issuers received this question from their cardholders.  At that point, the global payments networks opted to provide some clarification on a network rule that has apparently always applied to third-party gift card sales. 

The networks pushed out clarification in the form of frequently asked questions to outline that the third-party seller of any gift card is liable for chargebacks of “goods not received” in the scenario where the company whose name the gift card is branded with goes bankrupt or becomes insolvent.  This right is available to the consumer regardless of the fact the seller of such gift card clearly stated in terms and conditions surrounding the buyer’s purchase of that gift card that it should be treated as cash; and, therefore, any subsequent loss or transfer of that value is no longer an obligation of the third-party seller and, rather, this would be a risk the buyer would be assuming themselves. 

Let’s use the example in which Walgreens (Merchant Reseller) sells a Restaurant (Merchant Beneficiary) gift card to a cardholholder within their physical retail establishment or through an online ecommerce platform enabled by a Blackhawk or Incomm (Third-Party Gift Card Provider).  The graphic below outlines visually the example of the role each stakeholders plays and the value exchange in such a third-party gift card purchase/sale.

EXAMPLE: Purchase of a third-party gift card

Fast forward four months from the initial purchase/sale and the Merchant Beneficiary (Restaurant) declares bankruptcy or becomes insolvent.  The graphic below outlines the position of each stakeholder and inherent challenges that result.

EXAMPLE: Restaurant goes bankrupt and consumer issues chargeback of a third-party gift card they purchased

Is the network rule of cardholder dispute rights for “goods not received” suggesting that Walgreens is liable in the event Restaurant were to go through an unfortunate bankruptcy or insolvency situation?  The networks say that is absolutely accurate. 

In essence, Walgreens’ obligation to ensure the “goods received” of a gift card being funded with value according to the buyer’s wishes wasn’t enough.  Network rules suggest that Walgreens is also obligated to ensure the “goods received” of product & services of the restaurant experience Restaurant would offer in exchange for the value on that Restaurant gift card.  Come again?  How is that reasonable?  Those are, of course, rhetorical questions. 

Note that Walgreens no longer hold the full value of that third-party gift card sale.  In fact, sellers for these programs only retain a minor commission on that sale value while the remainder of the funds are remitted to the Merchant Beneficiary – Restaurant in this case.  It is impractical for Walgreens to make the consumer whole for that initial gift card purchase without taking a significant loss or seeking recourse from someone – but whom?

We all recognize the unfortunate situation the holder of that gift card has experienced – a gift with no value.  We also recognize the unfortunate situation the buyer and giver of that gift card have experienced – a gift that is now worthless.  However, to hold Walgreens accountable for Restaurant’s unfortunate demise is unreasonable.  The bankruptcy courts are in place to manage how value should be distributed among parties in this situation.  The reality that network rules supersede and override both bankruptcy laws and terms and conditions between a buyer and seller is challenging.  Yet, this is the unfortunate marketplace in which we all exist. 

All this being said, what is a retailer that sells gift cards within third-party malls to do?  First, join the conversation with MAG and the networks to find an acceptable resolution.  MAG has made some progress initially as both Visa and Mastercard have since reduced this dispute right for circumstance of bankruptcy and insolvency from a timeframe of  540 calendar days from the transaction date (assuming the gift card does not have an expiration date) to 120 calendar days effective 10/16/2021 for Visa and 04/22/2022 for Mastercard.

Although this is progress and we appreciate the acknowledgement by both Visa and Mastercard that their respective dispute rules required some differentiation due to the unique circumstances third-party gift card sales offer, MAG expects more: 

• First, regardless of the volume of financial losses experienced by sellers to date as a result of this rule, it is impractical and unfair to allow merchant terms and conditions to be superseded by network rules.  Contracts between a buyer and seller are just that – between a buyer and seller.  Network rules otherwise respect the terms and conditions set between a buyer and seller of warranties or final product sales so why not third-party gift card sales as well?  To give an example, I bought a product warranty alongside the white living room furniture I bought from Art Van.  This warranty was to keep my beautiful white couches white during their lifetime despite dirty (but lovely) children, grandchildren, and pets.  Within months, Art Van declared bankruptcy and our third-party warranty was immediately null and void.  Network rules didn’t come to my aid to override this unfortunate circumstance of Art Van’s demise and the risk to come of dirty white couches.  So, why the discrepancy? Why the lack of consistency in when and how network rules get applied?
  
• Second, a user’s right to exercise a timely return is important to consider.  Although this is a simple example, it is so very relevant.  As a consumer, I assume my purchase of a bunch of bananas comes with a term of those bananas being edible.  However, if I wait two months before I decide to eat those bananas I am at risk of having rotten bananas.  Network rules don’t enable me to return those bananas as “goods not received” simply because I waited too long and allowed them to go rotten.  The same logic applies in the case of third-party gift cards – the fact that the consumer waited too long to use the gift card and the merchant depicted on the gift card meanwhile went bankrupt should not be the liability of the merchant selling the gift card.
  
• Finally, the practical matter of a third-party gift card seller’s ability to validate the value remaining on the gift card previously sold is unclear as often times buyers of gift cards are not the end user or recipient of that “gift.”  Many times, buyers purchase goods and services at the same time as a gift card resulting in challenges for the merchant to track a gift card purchase easily to determine its original card value, much less the current value of that gift card.  The ecosystem should come together to provide a reasonable, efficient, and effective manner in which retailers can perform this research given they are absorbing this inherent risk which is outside of their control. 
  

While it is certain that protection of consumers is a legitimate and necessary expectation, the traditional practices of contract law between buyers and sellers as well as bankruptcy law for unforeseen circumstances such as the results of a pandemic that creates hardship for both consumers and business should reign.  And to be clear, it is not lost on MAG that retailers should and do take responsibility for the goods and services they sell; however, the service provided with regards to third-party gift cards is placing monetary value on a physical or electronic payment “card” for which future services in exchange for that value are to be redeemed by a separate and distinct third party – a responsibility that is beyond the reasonable capability of that seller. It is not reasonable that Walgreens (in my original example) must remain on the hook for four months after selling a Restaurant’s gift card in the hopes that Restaurant does not go bankrupt.

As we try to enable a fair and equitable marketplace for buyers and sellers alike, we welcome your input and support.  It is unfortunate it took a pandemic for everyone to identify the risk retailers are taking in participation of third-party gift card seller programs.  Yet, it is certain gift cards are valuable to consumers.  Let’s make sure the program rules and value is sustainable for all to keep them alive.