Understanding gift card risks

By Ian Halstead

With winter celebrations comes gift-giving, and with gift-giving come gift cards. But shoppers looking to give these typically easy gifts should research what they're buying to avoid disappointment. Know what kinds of gift cards are protected even if a company goes bust, and which gift cards aren't regulated, meaning you'll be out of luck if something goes wrong.

Andrew Johnson, director-general of the UK Gift Card & Voucher Association, and his members are so concerned at the absence of protection for such card buyers that they're in discussions with the Department for Business, Innovation & Skills to see if legislation might be introduced.

"Sadly, some retailers go out of business every year, and people who have bought cards will be affected," Johnson says. "We hope the government sees the logic of our case. People who have spent their hard-earned money on these cards should not lose out." worthless-gift-cards

The issue is also hugely relevant as the UK's gift card industry continues to grow, with charities, car-hire companies, hotels, restaurants and many more joining the high street retailers who initially drove the gift card market.

In recent years, major chains such as Blockbuster, Comet, Jessops and HMV went bust after the Christmas trading period, and those who had gift cards to those businesses were left with worthless plastic. However, Johnson says card buyers can reduce such a risk by knowing a little more about the gift-card industry.

Closed-loop versus open-loop gift cards
Johnson says cards that come with a network logo, such as American Express, Visa or MasterCard, mean buyers can never lose their money; these are called open-loop cards. However, cards issued and sold by an individual retailer or business always carry some risk, as they're not backed by consumer law, so buyers may lose out if the company goes bust (these are closed-loop cards).

Understanding the distinction could be the difference between losing your money and getting a full refund if the issuing business hits trouble.

"Closed means the card is issued and redeemed by the same retailer or business, and there are no regulations covering that sector, so if something goes wrong, there is no protection against loss," Johnson says. "Open means the card is issued by one party, but can be redeemed by another. This sector is highly regulated by UK and EU law and major providers, such as AmEx, MasterCard or Visa, typically issue the cards, [meaning the recipient can spend them anywhere that accepts those issuers]."

An open-loop card will typically be the best option, Johnson says, and will always have a clearly visible network logo.

"All the money that goes into open-loop cards is bank-bonded and secure, but with closed-loop products, you are just giving the money to a retailer," says Johnson. In most instances, there won't be a problem, especially if the closed-loop card is from a major high street brand.

However, Johnson explains, if a retailer hits financial troubles, and has to call in administrators to run the business, it will usually "turn off" gift cards.

"Usually, they'll be ‘turned back on' after 24 hours, but it can be as long as five days," he says. "And if a card is turned off, there is nothing you can do other than wait to see if it is turned back on."

Johnson's best advice to those who receive gift cards this holiday season: use them. Some people have a tendency to hold onto a gift card until they find the perfect item to buy with it, or are hesitant to go to stores they don't often frequent, even if they have a gift card for that store. But the longer you hang onto the card, the higher the risk that the business will run into trouble. The gift card could even expire.

"Every year, around 6% of the gift cards issued are never redeemed, or aren't fully redeemed, so the person with the card misses out," Johnson says. "I suspect some think they'll save the card and buy something later, but then they put it away somewhere and it just gets forgotten, which is a real waste."

See related: Your options if your card issuer changes your agreement, Skip the fine print, skip vital information

Published: 19 December 2014