The gift card scam

How outrageous is this?


We took your money and then spent it without giving you anything in return! Hahahaa!

It hardly takes a genius to figure out that “gift cards” are a ripoff: you give a shop your real money, that you can spend anywhere, and in exchange you receive a piece of card that can only be spent at that store. All so you can avoid the effort of having to choose a gift, whilst artificially avoiding the “ickiness” of giving someone money. (Because the critical part of the tradition that giving money is lazy and thoughtless is that actual currency is much less physically attractive than something with a corporate logo on it.)

But it’s the realisation that, unlike with real money, the people behind it can simply default on their debt to you, that should really tip you off as to why the things are absurd.

It happened to Australian consumers more than a decade ago with the old music business Brashs; now it’s happened again with bookseller Angus & Robertson. (Hey, guys, that “adding an Australian market premium to every book” thing worked out brilliantly for you, didn’t it?)

Why is it not a legislative requirement that any company that provides “gift cards” must retain the money to pay out those cards? That until they’re exchanged for an actual good, the company is basically holding the customer’s money on trust? Why is a company allowed to spend that money before it has actually provided the service for which it was exchanged?

Here’s how it should work: the company retains a record of all gift cards issued, and that money is held in a trust – a trust to which the company’s other creditors do not have access. The company can only take that money out as the gift cards are redeemed. If the company goes bankrupt, consumers can have faith they’ll get their money back.

It should be part of the consumer credit code – and until it is, consumers should boycott the things. There are far too many liberties that companies can take with that money that shouldn’t yet be considered theirs.

And if you’re looking for a present for me and thinking of giving a gift card? I won’t think any less of you if you leave it as cash, I promise.

UPDATE: Strikethrough the line about the retailers being to blame for the high prices – that’s the parasitic distributors and a compliant government (including, I regret to say, the Greens).

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20 responses to “The gift card scam

  1. jordanrastrick

    But it’s the realisation that, unlike with real money, the people behind it can simply default on their debt to you, that should really tip you off as to why the things are absurd.

    This isn’t strictly accurate. In a meaningful sense, money can be defaulted on. Of course the risk is a lot lower than for a gift card.

    Why is it not a legislative requirement that any company that provides “gift cards” must retain the money to pay out those cards? That until they’re exchanged for an actual good, the company is basically holding the customer’s money on trust? Why is a company allowed to spend that money before it has actually provided the service for which it was exchanged?

    For the same reason people and businesses are allowed to take on all sorts of other unsecured debts – because its far from clear the advantages of regulating them outweigh the disadvantages.

    Small businesses could never afford the regulatory burden of complying with such a scheme; you’d effectively be outlawing them from issuing gift cards. Corporations on the scale of Angus and Robertson could, although it becomes questionable if it remains worth it to them.

    I’m not sure why one class of creditors losing what are typically small amounts of money in the event of a corporate bankruptcy is such a major concern. I mean sure, it adds to the list of reasons why people probably shouldn’t bother with the things. It doesn’t require a government intervention. And in the worst case I could see legislation screwing up the markets for the kind of “gift cards” I really do care about, like buying someone a specific album on iTunes or a game on Steam.

  2. I was at Borders today and they’re doing the same thing.

    They’re also down to 70% off now, and I was browsing the shelves and actually buying stuff since it was now as cheap as it is online, and thinking “If you charged these reasonable rates in the first place, you wouldn’t be going out of business at all!”

    Just remember, Gerry Harvey says people are shopping online because it means we don’t have to pay GST. Yes, that’s it.

  3. jordanrastrick

    They’re also down to 70% off now, and I was browsing the shelves and actually buying stuff since it was now as cheap as it is online, and thinking “If you charged these reasonable rates in the first place, you wouldn’t be going out of business at all!”

    That, or they would have been selling stock at below cost and would have gone out of business a lot sooner.

    (Hey, guys, that “adding an Australian market premium to every book” thing worked out brilliantly for you, didn’t it?)

    Just remember, Gerry Harvey says people are shopping online because it means we don’t have to pay GST.

    Jeremy, you know as well as I do that the retailers pushed to end the ban on parallel imports, and Labor (and the Greens for that matter) screwed them over at the behest of Australian publishers and various members of the arts industry. Mitch, I’m assuming, might not be aware of this fact.

    How is it fair to criticise a company that has gone bankrupt for their government-mandated inability to complete on price with their overseas counterparts?

  4. I actually have to agree with Jordan here, it’s the publishers (and this complicit government) that are to blame for high book prices, not retailers, and also in the terms of regulatory requirements for trust-like setups.

    The whole thing could however be made more clear to consumers when purchasing these cards that they are, in fact, giving the business an unsecured loan.

  5. “In a meaningful sense, money can be defaulted on.”

    How? By the country going broke?

    “Small businesses could never afford the regulatory burden of complying with such a scheme; you’d effectively be outlawing them from issuing gift cards. “

    Don’t see why. Sole practitioner solicitors have to have trust accounts where they put fees and which they can’t access until they’ve invoiced the actual service in question. It’d be easier for small business – big business would have to have an accounting system in place keeping the money it receives from cards aside. But it’d be quite possible.

    “Jeremy, you know as well as I do that the retailers pushed to end the ban on parallel imports, and Labor (and the Greens for that matter) screwed them over at the behest of Australian publishers and various members of the arts industry.”

    Actually, that’s a fair point – I withdraw my earlier condemnation of the booksellers; it was the distributors who destroyed the local industry with their greed, not the retailers themselves.

  6. jordanrastrick

    How? By the country going broke?

    For physical cash, yes, that’s about what it would take.

    Don’t see why. Sole practitioner solicitors have to have trust accounts where they put fees and which they can’t access until they’ve invoiced the actual service in question.

    If you want to make out that the compliance burden isn’t so high, I think you should probably pick an example where:

    a) The cost of the service isn’t likely quite so large in comparison to the costs of administering a trust fund; and
    b) The operators of the business aren’t going to have such easy access to free legal expertise

    Actually, that’s a fair point – I withdraw my earlier condemnation of the booksellers; it was the distributors who destroyed the local industry with their greed, not the retailers themselves.

    Yeah, but at least all the intelligentsia heavyweights who backed the ban can rest easy knowing that only the kinds of stupid, soulless people who work in retail lost jobs as a result of their cupidity.

  7. “Yeah, but at least all the intelligentsia heavyweights who backed the ban can rest easy knowing that only the kinds of stupid, soulless people who work in retail lost jobs as a result of their cupidity.”

    I share your contempt for that campaign.

    “a) The cost of the service isn’t likely quite so large in comparison to the costs of administering a trust fund; and
    b) The operators of the business aren’t going to have such easy access to free legal expertise”

    It wouldn’t be all that difficult to set up a standard system for administering those things – and most of these businesses have accountants who can set up trust accounts anyway. If a business is issuing gift cards (ie, its own currency), you’d hope that’s not beyond it.

  8. jordanrastrick

    Should my local cafe have to set aside funds to cover their liabilties on my cardboard loyalty card?

    While I don’t pay cash directly for the thing, I do get it as part of a monetary transaction. Should those kind of promotions be exempt? If so, where exactly is the line drawn?

    What about if I ask my local restaurant to make up a gift voucher especially, so that I can give it to my friends for their anniversary dinner? They’d be entitled to ask for payment in advance. Do they need to call up their accountant and their lawyer to talk about setting up a trust fund if they are to be legally allowed to take my money and give me a piece of paper promising my friends dinner?

    It wouldn’t be all that difficult to set up a standard system for administering those things

    As someone who works supporting software systems for a large corporation that in a reasonably heavily regulated area, I’d like to suggest you’re seriously underestimating the difficulties involved for the government, the businesses and ultimately the consumer.

    – and most of these businesses have accountants who can set up trust accounts anyway.

    Yes. Accountants services are so cheap we can round them down to zero in a thought experiment, right?

    How fine grained do you want the security to be? Every time a gift card is sold over the counter, does money have to move right there and then from an operating cash flow account in to your trust fund? Oh sorry, I didn’t realise your tills or your POS software didn’t support that functionality, generic gift card issuing business – guess you’ll just need to spend millions upgrading it!

    I mean, besides my current job, I worked for five years in a medium-sized business that issued all sorts of gift vouchers, and I can guarantee you it would have been a serious cost of time and money to implement anything like what you’re proposing.

    I think this kind of “stronger regulation will clearly make this trivial problem go away with no possible negative side effects” thinking that does more damage than anything else to progressive causes amongst business people. They know first hand that a lot of well-intended, poorly designed regulation actually ends up having hideously inefficient costs, so they are reflexively suspicious even when well justified measures come along.

    Taxes may come out of business profits, but at least any non-sociopath can appreciate the resulting benefits that flow from public services. Red tape is just red tape.

    A consumer losing $50 when a gift card issuing business goes bankrupt is not the end of the world, and unless you can show you’ve actually put a lot of thought into the details of a workable, almost costless regulatory scheme Jeremy, it seems obvious to me your proposed law would be a massive net loss to society.

  9. uniquerhys

    “Should my local cafe have to set aside funds to cover their liabilties on my cardboard loyalty card?”

    Presumably they are, or they’d stop offering loyalty cards quick smart. But it is their money they are setting aside, not yours. Usually by calculating their profit margins so that the loss of 1-in-10 is absorbed as part of the cost of doing business. Don’t like being slightly overcharged for the 9-in-10? Feel free to take your money elsewhere.

    Gift cards are like buying shares in the company – you have no guarantee that you’ll get your full money back. But at least with shares you’ll get something on the dollar, even if not the full original amount. With gift cards you get zip – you cannot even sell the “share” for below cost and recoup some of your investment.

    Either gift cards are a secured loan, with money required to be set aside to cover the liability, or they are a scam. And scams should be regulated out of existence. If the company doesn’t want to pay the regulatory cost of running a non-scam, they are welcome to not offer gift cards in the first place.

  10. jordanrastrick

    Or, they are an unsecured debt. Like any credit card loan. Or an unsettled invoice between business. Or 90% of deposit accounts, given our system of fractional reserve. Or like any mortgage on an asset that’s in negative equity. Or a government bond, widely considered the safest class of financial assets in existence.

    Better be quick uniquerhys, the scammers are multiplying! When youre done arresting every banker, government official, and bank customer in the world for their fraud, feel free to come back and talk about gift cards.

  11. narcoticmusing

    Jordan – your idea of unsecured and mine vary greatly. In any case, there are contractual remedies for most of what you listed. The gift card system is represented to the purchaser as a purchase of goods to the value on the card. Have you EVER purchased a gift card where the shop has said to you, ‘remember, we are not obliged to honour this…’

    So either, they are purposefully deceiving the public, which is a contravention of the TPA (misleading and deceptive conduct in commerce and trade) which I am sure they will claim they aren’t doing OR they shouldn’t be allowed to simply renege. For all intents and purposes, they lead the purchase to believe a trust like situation is occurring; so it is misleading for them to then conduct themselves otherwise.

    Just my 2 cents

  12. uniquerhys

    “Or, they are an unsecured debt. Like any credit card loan. …”

    Gee, I’ll have to try that next time the credit card statement comes due. “You loaned me money under the assumption that I’d pay it back, but I don’t feel like it. It was unsecured. Too bad. Have a nice day Mr Bank”.

  13. jordanrastrick

    Please define unsecured, in that case.

    As for the book retailers, they are in administration. If they were solvent and arbitrarily refusing to honor cards, I’m sure ordinary consumer law such as the TPA would indeed provide remedies. However default, there are a bunch of creditors in line with a stronger claim, legally and IMO ethically, than gift cars holders.

    When you take on an unsecured promise from a debtor, you run the risk of default. If its your life savings at stake, state intervention might be called for. If its a 32nd birthday present from your cousin, frankly your plight is of less concern.

  14. narcoticmusing

    The creditor priority is based on the premise that a creditor should be savvy enough to secure his debt. The normal schmo on the street is not savvy and, whether this is foolish or not, doesn’t even understand they are even a creditor let alone that they are last in line.

    Seriously Jordan, do you expect someone to demand a charge over the bookstore’s assets for the $50 gift card? The store would refuse – which goes back to Lefty’s whole argument that one should avoid them.

    Here’s the clincher though – most normal people, based on the meaning of the gift card, believe it IS a charge over the bookstore’s assets, restricted of course to its movable merchandise of course.

  15. jordanrastrick

    The creditor priority is based on the premise that a creditor should be savvy enough to secure his debt. The normal schmo on the street is not savvy and, whether this is foolish or not, doesn’t even understand they are even a creditor let alone that they are last in line.

    Its not the role of the government to protect people from every eventuality that can go wrong in their lives. The normal schmo on the street likely doesn’t understand probability theory either; but while there is a perfectly legitimate case for regulating gambling to prevent serious harm to people inclined to addiction, outlawing it altogether would clearly do more harm then good.

    which goes back to Lefty’s whole argument that one should avoid them.

    I’m not saying they shouldn’t be avoided. I’m saying there’s little compelling reason to regulate them and plenty of good reasons not to.

  16. jordanrastrick

    Gee, I’ll have to try that next time the credit card statement comes due. “You loaned me money under the assumption that I’d pay it back, but I don’t feel like it. It was unsecured. Too bad. Have a nice day Mr Bank”.

    There seems to be some confusion in this thread about what the word “unsecured” means in a financial context. Since none of the people who don’t understand the term are prepared to go to the effort of looking it up, I’ll oblige.

    http://en.wikipedia.org/wiki/Unsecured_debt

    In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation.

    Your credit card debt, uniquerhys, is not collateralised against any of your assets. If you fail to pay, your bank can take you to court, but they can’t simply seize the things you purchased with the card, and if you are bankrupt, it is indeed “Too Bad” for them. The case of a company who has issued an obligation such as a gift card and and is subsequently liquidated is analogous.

    Is anyone still confused about what unsecured debts are? To be crystal clear about this, the plan to mandate gift cards be secured would put them in an unprecedented regulatory category, since nearly all of the debts and general obligations in our economy are in fact unsecured, or at best collateral is provided by mutual consent of the contracting parties such as in a mortgage. In fact, off the top of my head, I can’t think of a single example of a debt or obligation that is required by law be fully collateralised. Except, if the poor forsaken Angus and Robertson customers that seem to all be commenting here were to get there way, gift vouchers. Because you know, we’re totally comfortable that your bank needn’t have the funds to pay out your life savings on demand, but heaven forbid you can’t buy that copy of Twilight you’ve secretly had your eye on all this time.

    I mean, seriously.

  17. duncan1978

    FWIW, i find your argument very convincing jordan.

  18. jordanrastrick

    Thanks duncan. It’s nice to know I’m not just typing to hear the sound of my own keystrokes.

    In between you, Ben, and Jeremy’s agreement on the imports issue, I should probably just quit while I’m ahead here…

  19. Well, to revive the disagreement: if a business isn’t of a size where it can absorb the compliance costs in order to properly hold customers’ money when they lend to it, then maybe it shouldn’t be issuing its own currency.

    If the upshot is that fewer of these consumer ripping-off bits of plastic get “sold”, then is that a big negative?

    I concede this isn’t a big issue in the scheme of things, but that doesn’t mean it shouldn’t be properly regulated.

  20. jordanrastrick

    If the upshot is that fewer of these consumer ripping-off bits of plastic get “sold”, then is that a big negative? I concede this isn’t a big issue in the scheme of things, but that doesn’t mean it shouldn’t be properly regulated.

    I’m not very fussed on “the here’s $30 to spend like cash in a franchise bookstore” stuff which I’ve always been a bit indifferent to. If they were regulated out of existence I would still say it was a silly and unnecessary piece of nanny state inverventionism, but I wouldn’t lose sleep.

    My concern is for the restaurant example I gave. Or the BridgeClimb certificate I gave to one of my best friends on his 18th. Or the copy of Portal 2 I bought recently as a gift for a friend and had to wait til the appropriate occasion to give to him. Or the subscription to a newspaper that is just an unsecured promise to deliver future copies that may never be printed. Or the unlimited rides passeses at Luna Park where I used to work that can only be given to anyone else in the form of a voucher, and were at times painful enough to administer as it was without having to have some complex trust fund arrangement in place.

    If your proposed legislation has the potential to have any effect whatsoever on any of the above (or other similiar instances) – including increasing the cost to businesses of issuing them, which would ultimately flow on to prices and hence come in part out of my pocket – then I would hand out how to vote cards against you, so to speak.

    A very, very carefully designed law may be able to circumvent any such problems and affect only “ripping-off bits of plastic”. But your personal dislike of gift vouchers isn’t the criteria by which they should be judged; consumers who want to buy them should be free to buy them, and the only valid concern is how mislead people are into believing the things to be completely risk free, how much loss to society this mistaken belief causes, and how much consumers deserve to be protected by the State from taking responsibility for their own ignorance. I think the answers to these three points in this instance are “somewhat, close to zero, and close to zero”; so the risk that a ham-fisted law would screw up products and services I actually do care about, not to mention the political damage any left-wing party who implemented this would suffer in terms of increased suspicion and resentment, vastly outweigh in my mind the possible benefit.

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