Franchising in China: Agreeing Cross-Store Use and Liability for Prepaid Member Balances

When businesses with existing prepaid membership schemes start franchising, it is easy to treat ‘valid nationwide’ as a straightforward brand service. Yet the company-owned store collecting the money, the franchisee supplying the goods and the party against whom a consumer can assert their rights may be different entities. If a franchise network is to share the trust members place in the brand, it should establish workable, auditable and sustainable rules for cross-store redemption before recruiting franchisees.

1. Map out responsibility for funds and services first

Rather than starting with whether the systems can be connected, first establish which entity enters into the transaction with the consumer. List the issuer of the prepaid account, the entity that actually receives the funds, the store supplying the goods or services, and the entity responsible for refunds and complaints. Cross-check the merchant name displayed on the payment page, the membership agreement and the actual flow of funds. Responsibility cannot be determined by the brand name alone.

Distinguish at least three types of balance: existing balances sold through the company-owned network, new balances sold after franchised stores join, and promotional credits awarded free of charge. Record consumers’ paid-in funds separately from promotional benefits. Also specify the order in which they are used, the products they can be spent on and how refunds are handled, rather than combining different types of entitlement into a single figure.

For example, if a consumer tops up at a company-owned store and then spends that balance at a franchised outlet, whether head office reimburses the franchisee, and on what basis, should not be left for negotiation after redemption. Before recruiting franchisees, prepare a responsibility matrix identifying, for each type of balance, the party receiving the money, the party honouring it, the party responsible for settlement and the person or entity handling exceptions.

2. Include cross-store commitments in contracts and disclosures

Commercial franchising in mainland China is governed by the Regulations on the Administration of Commercial Franchises. Article 11 requires a written contract and lists consumer rights protection and liability for compensation among its principal terms. Cross-store prepaid balances directly affect franchisees’ costs of fulfilling their obligations, so the rules should not appear only in system notices that may be changed at any time.

A schedule to the contract should specify:

• Which stores participate in cross-store redemption, and which balances and products are eligible;
• Whether restrictions apply to franchisees accepting existing balances, and how consumers will be informed in advance;
• Who bears the cost of product discounts, promotional credits and payment processing fees;
• Settlement cycles, calculation methods, error correction and liability for late payment;
• Who will continue providing service if a store temporarily closes, leaves the network or experiences a system outage.

The Regulations also require franchisors to provide the prescribed information and the contract text in writing at least 30 days before the contract is signed. Membership system charges, required equipment, head office support, and relevant costs and conditions borne by franchisees should be explained in the appropriate disclosures, not introduced only after a franchisee has signed.

This 30-day period is a pre-contract disclosure requirement for franchising, not a deadline for refunding consumers’ prepaid balances. Nor can the internal allocation of responsibility in a franchise agreement automatically override consumers’ statutory rights. The prepaid arrangements must also be checked separately against applicable consumer protection requirements, prepaid consumption rules and local rules. Completing a franchise filing does not mean the prepaid business has been approved.

3. Use a company-owned store pilot to test whether funding can support redemption

Before opening the network to franchisees, company-owned stores can simulate settlement between independently operated businesses. Even if the money ultimately belongs to the same company, top-ups, redemptions, refunds and amounts payable should be recorded separately to test whether franchisees would have to fund costs for extended periods. This is an operational recommendation, not a substitute for the Regulations’ requirements for a proven operating model and conditions such as the ‘two stores, one year’ requirement.

The pilot should test more than routine purchases. It should also cover partial refunds, returns at another store, payment reversals after a top-up, redemption of promotional benefits and temporary store closures. Each transaction should, at a minimum, be traceable to the original order, balance type, store providing the service, calculation rules and settlement status.

Pay particular attention to concentrated redemption: if a store has not received the top-up funds but has to supply a large volume of goods over a short period, can head office settle promptly? Continuing inflows from new top-ups should not be treated as a reliable basis for meeting existing redemption obligations. Businesses should use their outstanding balances, available funds and pilot results to determine the scope of participation they can realistically support.

The settlement basis should also be tested during the pilot. Settling at the product’s list price, the amount actually deducted from the balance or a separately agreed price will produce different costs. ‘The system calculates it automatically’ is no substitute for both parties agreeing the formula.

4. Turn exception handling into practical store procedures

The operations manual should reflect the responsibilities set out in the contract and tell staff what to do when a balance cannot be checked, a deduction succeeds but the order fails, or a redemption is processed twice. Specify who is authorised to create a replacement order, who can approve refunds and which records must be retained. This helps prevent staff making unauthorised promises or sending consumers back and forth between different entities.

For closures or departures from the network, arrange in advance how outstanding orders, unsettled amounts and historical transaction records will be handed over. Consumers need to know which stores can still serve them and where to request a refund; franchisees need to know how the final settlement will be verified. Simply closing an account must not erase obligations that remain unfulfilled.

Head office should also assign responsibility for maintaining the list of participating stores and information provided to consumers. When participation changes, system messages, membership agreements and in-store notices should be reviewed together, so that advertising does not continue to promise ‘valid at all stores’ when balances cannot actually be used everywhere.

Practical takeaway: Before recruiting franchisees, complete a prepaid-balance responsibility matrix, a cross-store settlement schedule and an exercise testing redemption problems. Shared membership arrangements should become a network-wide promise only when responsibility for receiving funds, fulfilling purchases, settlement and refunds can each be assigned to a specific entity.