Friday, 8 August 2008

WrapIt Crashes

You may have seen the news that WrapIt, the wedding gift list company, went into administration this week after its credit card takings were bonded by its bank.
Exactly the same scenario that happened to Red Letter Days in 2005 and Farepak in 2006.
In Red Letter Days' case, Barclays bonded £3million of the company's cash (as well as holding a further £1.25million in other security against their perceived contingent liability on experience vouchers purchased by credit card), causing a cashflow crisis which forced the company into administration.
12 months after the company crashed, the cost of fulfilling the vouchers claimed by customers (and bear in mind the media surrounding the collapse caused a huge run on vouchers) was less than £1.5million. The rest of the bonded money, instead of going to the company's creditors, went as a 'bonus' to the new owners of the company. This was a deal done by Barclays and the administrators which to my knowledge was never reported to the creditors.
The practice of 'bonding' a company's takings in the way that happened to RLD and Farepak and WrapIt will almost always certainly cause the business to fail. Its quite easy to see why the bank takes the action it does, justifying that it needs to protect itself in the event the company fails but this always becomes a self-fulfilling prophecy.
If we are to prevent similar business failures, the legality of the practice of 'bonding' should immediately be reviewed by DBERR. In my view bonding acts to make the bank a preferential creditor which I believe under current insolvency law is illegal.
If credit card facilities are extended to a company without bonding terms (effectively giving that company the ability to utilise revenue as working capital, upon which they will then base their financial forecasts) then banks simply should not be allowed to alter the terms of the agreement down the line, at least not without a minimum of 12 months' notice.

23 comments:

Leona said...

I had heard about Wrapit's fall. It is such as shame, thanks for explaining what happened in a little more detail. It is a bit clearer now.

When you say bonded for a perceived contingency. Did this mean that you were unable to pay the suppliers for the tickets purchased because the bank was holding £3 million pounds of the money to do this? Therefore stopping your business dead in its tracks.

Or was it because your overheads were eating into the money put away to pay suppliers so they held it for this reason? Therefore not giving you breathing room to get your overheads back in track and cover the payment to suppliers through the profit?

I am sure it is explained more in your book but I haven't had time to grab it yet, hopefully this weekend. However, I am just trying to understand how this happened.

Stephen said...

The markets are not as chaotic as people think. They are precided over by a small number of self-fulfilling prophecists.

When they want oil, gold, food, gas etc to rise... Its rises.

When they want it lowered... its goes lower.

When they don't want to help... they don't help. When they don't care less about a business failing... they let it fail..

When global warming is required on the agenda....its on the agenda.

It is amazingly simple, yet most people just don't get it.

It is a better policy to atomise the positioning of a business and to fly lower under the radar. That way these circumstances don't bring the whole animal down.

Anonymous said...

Surely the issue here with all three companies is actually overtrading leading to the cashflow crisis.

With credit card orders the bank retains a liability to the customers if the company fails to provide the product. Its reasonable therefore that they should seek to protect their risk. If they didn't, all that would happen is that the cost of capital would have to increase to cover the losses that would inevitably follow continued support of companies that over trade.

C

julesbrad said...

A couple of comments has raised a question about RLD.
"and bear in mind the media surrounding the collapse caused a huge run on vouchers"
and from a couple of posts earlier
"it caused a run on voucher claims - which the voucher owners would probably have forgotten about if the crash hadn't been so high profile"

With these comments in mind, does it mean that you planned your business in a way that took money with the hope that many of the vouchers would not actually be used - basically giving you money for nothing ?
If this is the case, and if the crash had not happened, what percentage of vouchers would you say were purchased and never used ?

Anonymous said...

If the run on vouchers was less than 1.5 million that means there was approx 2million left over, in bond, which you say was given to the new owners, why did the bank just not let you have it so that you could keep trading as everyone new who they working with.
The more I hear the more it sounds like some sort of deal was being done behind your back hmm!

TheDLOG

Anonymous said...

Reckon rachels points are all a big build up to the launch of her new company

RLD2.

Rachel Elnaugh said...

Anonymouse

Rather, they are relevant to my current business Rachel Elnaugh Ltd, which provides support to entrepreneurs in the small business sector.

The issue is always one of cashflow; if a company creates its cashflow forecasts based on 100% credit card receipts, a sudden change in that policy by a bank - so that the company overnight receives 0% of those receipts - will always kill the business.

Now, one may take the view that WrapIt was a business which needed to be killed (given it had not made a profit in the 6 years it was in existence) but many other companies faced with bonding do have underlying profitability and therefore do not deserve to die simply because a bank manager somewhere realises they have made a mistake and taken on too much risk.

There needs to be a proper notice period to allow the company concerned to re-finance.

Anonymous said...

Rachel

I think the issue is as much to do with the terms of the Consumer Credit Act as it is with the banks. I agree that changing the terms of your banking arrangement is potentially catastrophic. In my experience this is not a decision arrived at overnight by the bank but something that results from a loss of confidence by the bank that occurs over time. It is worth spending time cultivating your banking relationship as much as any other. Banks don't simply pull the plug on a good business.

C

Rachel Elnaugh said...

Not quite sure if this is accurate. My experience is that when activity on an account hits a certain level it moves to a different (higher) level of authority within the bank for review.
If you have worked with banks you will know that, no matter how good the relationship with your current manager, if you have to go through a separate credit committee for higher approval limits the relationship won't matter nearly as much as 'ticks in the right boxes'.
Banking is set up in this way to avoid a manager's personal rapport with a client to get in the way of rational decision making.
And yes, the decision to withdraw a facility (whether it be a credit card merchant services facility or an overdraft) can literally be imposed by a bank overnight.

Anne Herbert said...

I have to admit I had never heard of Wrapit until the news hit the wires so don't know if it is a leader or follower in it's sector. My concern is for the other players in the wedding list market - in the same way that RLD Mark 1's demise had on the experiences sector - could this impact other players?

Anne

Leona said...

John Lewis is the market leader with the majority of the market but Wrapit were one of leaders in the share of the rest (based on research from 2004 so a lot can change in 4 years).

This isn't the first business like this to under another one fell in 2003 that had a similar business model.

There was a full marketing report done into the industry but that was just what I found through searching the web.

Chris said...

Another example of the bank's superb PR which pulls the wool over people's eyes.

Whilst most people I talk to are very happy that their bank refunds claims for fraudulent activity on their account (getting bonus points for the banks for being so kind to their customers...) most people don't realise that the banks are pulling the money back from the retailers, who are still poorly served by the banks lack of effective action against credit card fraud.

Rachel, as you are now championing small business would you please consider extending you campaign against bonding to include the treatment of the very small businesses all over the country who suffer at the hands of the banks when accepting card payments.

Anonymous said...

Rachel, if I have understood correctly then yes you are very accurate, we had this senario some years ago, where the bank we where with started that very system, we were fortunate enough that we went with the 'next level up' manager, but I believe that was more to do with us knowing that particular manager and he insited that he looked after our account.

TheDLOG

Stephen said...

The banking IT systems are a disgrace. They have rolled systems out well before they are anywhere near secure. The banks make a lot of noise about credit card fraud, but it is only going on because the systems THEY IMPLEMENTED are not secure.

Again we are told that there is no such thing as "secure". There is only "mitigation of risk".

Well let me tell you ladies and gentlemen... There is such a thing as total security.. just that there is a whole industry out there that makes a living on making your feel happier about using poorly designed technology.

"The security industry".

When they lose my money - it is only right that they should replace it.

chris said...

but Stephen, my point is that is isn't normally the banks that are replacing it, it's the retailers.

Take this scenario...
Your credit card is stolen/cloned etc.
The thief goes onlines & shops away.
The card passes the checks implemented by the bank through their merchant account.
Retailer despatches goods

15 days later you get your credit card statement & dispute the transaction at www.ashop.com

Bank investigates, refunds the money to your account so you are satisfied that the bank has returned your money.

What most people aren't aware of it the fact that the banks are then clawing the refund back from the web shop - painful if you are a small online retailer & difficult to fight with the bank as they hold all your credit card receipts so can dip in to it at will.

I don't actually believe that the banks have the ability to make credit card transactions 100% secure. It is actually pretty scary when as an internet retailer I phone my merchant account bank (HSBC) & am transferred to an Indian call centre where the operatives seem to have little knowledge of internet accounts & will add extra domains etc. to your merchant account with no questions asked!

Stephen said...

I believe that the banks would have treated RLD as a special case. And as such, the confidences in the company would have been felt very differently than that of a more conventional business.

It is very possible that RLD would have been cast in the same light as the good old "boom and bust" Dotcom's. Another reason why decisions would have gone against RLD.

As we all know, confidence in investments is a very complex animal and the decisions you take can remain with you forever.

The decision makers at the bank appear to have seen RLD as too great a risk, when measured against the risk profile of the bank - at that particular time.

Anonymous said...

I have experience of this from both sides as I used to be a senior guy in a bank and now run my own business.

It is true that as your business grows the account management activity is often migrated to a different team. It is also true that credit committees review decisions away from the relationship to take a holistic and objective view. However, the presentation of data to the credit committee and any subsequent appeal is very much in the remit of the relationship manager. It is therefore worth developing your relationship as these guys do bat on your behalf.

By the way, credit committees don't just assess risk either but also the economic return. The risk tolerance of the bank to particular sectors does change over time (see the news HSBC are withdrawing from the leisure sector as evidence of this). However, this is usually a gradual process and an obvious one at that.

Banks do get it wrong though. I have seen at first hand really poor credit decisions. The ones you notice are the ones where businesses fail as a result but I have also seen the flip side where the bank has lent or lent uneconomically when it clearly should not have. Its not an exact science.

Where I do fully agree with Rachel is that banks need to allow some time for companies to re-finance if they wish to materially change the banking arrangements with the company.

Banks are not perfect but we are blessed with generally a good banking system here guys.

C

Anonymous said...

I'd say Wrapit has made more mistakes than they are willing to admit. Always a good PR tool to offload the blame to the bank rather than admit to management failures. Most company owners take this tack to cover up their own inadequacies.

Anonymous said...

I must be incredibly unlucky - I lost over £200 when Red Letter Days went bust, and I never saw a penny. I have now lost over £4,500 from Wrapit.

Surely company directors should take some responsibility for the failure of their business and the compensation of customers? Maybe then they would think twice when using "today's money to pay yesterday's bills"?

Anonymous said...

Rachel

You must have a VERY short memory. You and the same with the Directors of Wrapit used customer money 'Prepayments' which ethically, although not at the moment legally should be shown as a liability on your balance sheet and ring fenced until paid to a provider as working capital and to cover losses.

Hugh losses, which you tried to hide in your accounts, pretending how successful you are on TV. Stop blaming the banks for your failures………..

I can’t believe that business people would listen to you……………………

Stephen said...

Anonymous. Understanding of the world is relative to the responsibility you held in your life.

If you are a worker, you nit pick about the way management should do this that or the other. If you are a manager you nit pick about how the owner should be doing this or that.

It sounds to me like you are either a worker or manager. If you are a brand owner, you need to start realising that running a multi-million business, paying peoples mortgages, keeping customers sweet, playing the banks games etc is a much harder balancing act than you might think.

Enough of the cheap jibes. Reveal yourself for what you truly are. Then perhaps we can take a view on you as well. Failing that - shut the f* up!

Anonymous said...

"The practice of 'bonding' a company's takings"

Is entirely normal and sensible.

Doubly so when a company does not have a sensible and agreed (with banks and creditors) revenue realisation model.

Rachel Elnaugh said...

See my comments at http://racheleelnaugh.blogspot.com/2008/08/red-letter-days-still-in-red.html for the explanation of why it is not always best or acceptable practice.