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Blog - Published 5th April 2018

Lawyers admit no easy fix to chargeback loophole in online retail

online retail loophole

Featured in Computing.co.uk

The fraudulent loophole which enables consumers to get hold of online goods for free is unlikely to be closed without new legislation, state leading lawyers.

Lawyers have admitted that there is no easy fix to the chargeback loophole in online retail which enables consumers to fraudulently purchase goods, then claim their money back.

Computing first reported on the issue in January 2018, when a concerned retailer warned that his business was being defrauded of significant sums due to the loophole.

The loophole involves consumers buying goods online, then claiming non-delivery in writing to their payment provider. In this instance, retailers are legally obliged to refund the purchase, with no recourse or appeal available.


Gavin Cunningham - Menzies AccountantGavin Cunningham, Menzies Partner of Forensic Services, said that the fraud is on the rise.

“This type of online fraud, involving an individual customer, is hard to quantify but anecdotal evidence suggests it is becoming more common. It is the modern equivalent of shop lifting except now the goods are delivered to the fraudster’s door.

Online retailers are losing out financially due to a ‘loophole’ linked to consumer credit act protections, which dictate the practices of credit card companies. This loophole effectively means their hands are tied and there is little they can do to tackle the problem. The fact that this type of fraud is conducted by individuals and involves relatively small sums also makes it difficult to deal with.”

Cunningham added that the situation is unlikely to change for retailers without changes to the law.

“Legislative changes may be needed to close the loophole; forcing credit companies to adapt their practices.

“It is also possible that retailers, credit card companies and insurers could start to share existing locational information that can pinpoint the prevalence of fraudulent claims and other fraudulent activity, but it remains unclear how this might be used until an automated system is devised that shares such information in real time.”

bagsMartin Noble, commercial partner at law firm Shakespeare Martineau, agreed that the situation is hard to resolve, adding that it implies retailers are “guilty until proven innocent.

“The system was designed to protect the consumer, and when used in good faith can be very beneficial. However, fraudsters have learnt to exploit these weaknesses in the chargeback process, using it as a method to illegally obtain free goods.

“The fact that the process was designed to protect the consumer makes it very difficult to find a solution. As a system which favours the consumer, retailers are assumed guilty until proven innocent, shifting the onus onto them to prove the buyer has acted unfaithfully. More often than not this leaves retailers incurring extensive losses.”

Noble advised retailers to help consumers with genuine issues, and to keep a close eye on purchasing patterns.

“Whilst there is no easy fix to this widespread issue, retailers must make it as easy as possible for a customer to contact them about issues with orders. Problems often arise when it becomes difficult for a customer to make their complaint and after a while they may give up and go directly to the bank.

“Another solution for retailers is to police unscrupulous behaviour by monitoring customer purchase patterns. If chargeback fraud becomes more widespread, retailers must become smarter when it comes to order processing and the delivery of items.

“With the volume of online deliveries skyrocketing, the chargeback loophole has the potential to greatly impact retailers. There is certainly no easy fix, and it may be that retailers simply end up passing these rising costs on to consumers through increased retail prices. Ultimately a rebalancing of these consumer rights and/or a technological solution may be the answer, but that seems some way off at present.”

For more information on the online retail loophole, please contact Menzies Partner and Forensics Specialist Gavin Cunningham, at gcunningham@menzies.co.uk or call +44 (0)20 7465 1984.

Find out more about our forensics accounting services.

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Gavin Cunningham

Forensic Partner

Gavin Cunningham heads up Menzies Forensic Accounting advisory team providing financial investigation services. He is also a Partner in the London office.