The Dark Side of Stored Value: Bad Debt for Web Retailers

The booming business in gift and other stored-value cards, which represent an increasing share of sales for merchants of all sizes, is beginning to have an ominous side effect for online merchants: a hike in bad debt. The prepaid plastic, which carries a fixed value in cash and can benefit merchants when holders exhaust their value and then spend more of their own money in stores, can also boomerang badly on Web retailers when users buy expensive merchandise on installment plans and then allow the cards to run out of value while payments are still pending. “Stored-value cards are driving us nuts,” Joan Radtke, director of credit at ShopNBC, which sells jewelry and electronic gear online at an average ticket of $180, told an audience of catalog and Internet merchants today during a panel discussion at the Direct Response Forum in Chicago. “They are a big bane of our existence.” Radtke said because of the high value of ShopNBC's merchandise, 65% of the site's sales are made on installment plans. Meanwhile, debit cards, of which stored-value cards are an undisclosed component, have grown to represent 27% of the merchant's sales, with the balance coming on credit cards. That, she says, has opened a can of worms for the merchant, a unit of ValueVision Media Inc, an Eden Prairie, Minn.-based distributor of home-shopping programming via cable TV, satellite, and the Web (The NBC TV network owns 40% of ValueVision). Holders of stored-value cards, she says, are using them to buy goods in installments, then allowing the cards to run out of value before all the payments are made. She fights the problem mainly by turning the accounts over to collections, she said, while relying in part on Visa USA bank-identification-number data she is able to obtain through Paymentech L.P., ShopNBC's processor. In fact, prepaid cards now account for 10% of the retailer's writeoffs, she said. Anecdotal accounts given to Digital Transactions News at the conference by other online merchants accepting stored-value cards echoed Radtke, with one adding the problem has become severe enough that some merchants have flatly refused to accept the plastic.