The possibility of a major retailer entering bankruptcy highlights the risks that consumers and businesses face when relying on stored-value products and loyalty programs. While gift cards remain one of the most popular prepaid payment products, questions often arise about their status during corporate restructurings and bankruptcy proceedings. For consumers, uncertainty surrounding gift card redemption, loyalty rewards, prepaid cards, retailer bankruptcy, and consumer confidence can create concerns about preserving value and accessing earned benefits. As retailers navigate financial challenges, program managers and issuers must be prepared to address customer questions and maintain trust in their payment and rewards offerings.
Rumors are circulating in the press that bookseller Borders Group may file for bankruptcy as soon as next week. Already the Internet is abuzz with advice to consumers that they should redeem their gift cards and loyalty rewards as soon as possible. On January 27, the company announced that it received a$550 million secured credit facility from GE Capital, and it was still promoting its gift cards on its Web site.
The company said in its release that one of its key strategy pieces going forward will be to expand the Borders Rewards Plus Program. Currently, the program gives repeat shoppers “Borders Bucks” that they can redeem for merchandise.
If Borders does go bankrupt, it could raise some uncomfortable questions around its gift cards. In a bankruptcy, the company could ask the court for permission to continue honoring its cards as away to drive sales. If the judge agrees, then consumers holding the cards have time to redeem them. If not, then the consumers holding gift cards could be told to get in line with all the other creditors of the store, which means they are not likely to see those funds again.
The second option would further shake consumer confidence in gift cards, and possibly in prepaid cards in general. It could lead to calls for laws that would require gift card funds to be set aside in a trust fund, for example.
As the retail industry watches and waits to see what happens to Borders, gift card program managers should consider what they will tell customers if Borders cards suddenly lose their value.
The situation facing Borders serves as a reminder that gift card redemption and loyalty rewards are ultimately tied to the financial health of the issuing retailer. While consumers often view gift cards and prepaid cards as cash equivalents, retailer bankruptcy can introduce significant uncertainty regarding their value and redemption rights. As the retail landscape continues to evolve, issuers, program managers, and regulators may face increased pressure to strengthen protections around stored-value products and customer funds. Preserving consumer confidence will require clear communication, thoughtful contingency planning, and a careful balance between business flexibility and customer protection when financial difficulties arise.
