by Renuka Sane.
There is great ire among consumers about financial fraud. Fraud is the deliberate deception of one party by another for the purpose of unlawful gain, typically involving the misrepresentation or concealment of material facts. When fraud occurs, the key question is: who ends up paying for it? The answer to this is not so obvious. Consider the recent incident involving Falcon, an online bill discounting platform now defunct. This platform was promoted since 2021 as a peer-to-peer invoice finance platform. It had about 7000 investors and had raised Rs.1,700 crores by 2025. Retail investors lent money against invoices supposedly issued by reputable companies, earning high returns over short tenures. Until suddenly they didn't. Consumers realised one day that Falcon had closed its offices and cut off all communication. The ensuing cascade of chargebacks for services not rendered, their denial by financial firms, a subsequent Bombay High Court interim order which continued the freeze on chargeback requests illustrates how the existing system leaves consumers in a precarious position. There is no easy answer when it comes to dealing with fraud, but understanding the options is a good place to start.
The case
Falcon operated an online platform for short-term invoice/bill discounting. Payments to Falcon were routed through a payment aggregator called Worldline ePayments India Pvt. Ltd. Worldline had pooling accounts with various banks and cards, including the State Bank of India through which such transactions would be facilitated.
Falcon ceased its operations owing to allegations of fraud. Once customers figured that Falcon was no longer operational, they started asking for reversals of their transactions, or chargebacks, on the basis of services not rendered. As a result Worldline's pooling account with SBI started to get debited. Worldline requested SBI not to debit their pooling account, and SBI initially agreed for a limited period. This essentially meant that SBI would not be able to honour customer requests on chargeback. Once the limited period got over, SBI began to debit Worldline's account again. A Vacation Court order on May 19, 2025, temporarily stopped SBI from continuing to debit Worldline's pooling account to cover chargeback requests related to Falcon's transactions.
The dispute continued. SBI didn't want to be the only bank which was temporarily stopped from debiting Worldline's pooling account and to risk its funds getting debited. Other banks (or card companies) wanted a simpler life by not having to deal with chargeback requests. Worldline didn't want any debiting from any account - according to them if the customer was defrauded by Falcon, they had nothing to do with it.
All of these parties were given relief by the interim order of the Bombay High Court which ordered that no bank or credit card company will now debit Worldline's account on chargeback requests. The Court appears more sympathetic to shareholders of the intermediaries and banks relative to customers, as they have lost their money, at least until there is a final order in this case.
Who should the burden be on?
While the Bombay high court seems to have bought into the argument that the intermediary is just a pass-through, the critical question in markets remains, "who bears the burden?" A standard response in India is to increase licensing and networth requirements to carry out financial activity, but that often makes the informal market bigger, and fails to address the problem of fraud. We have three choices - leave it to the customer, hold the firm committing fraud to account, or place liability on the intermediary. The choice we make will shape the structure of markets, the roles of intermediaries, and incentives for honesty and risk.
Option 1: The customer
In a caveat emptor or "let the buyer beware" world, the burden of due diligence rests solely on the customer. If Falcon ceased operations, and consumers money was held up, then it is the consumers loss.
On the one hand, a caveat emptor world incetivises caution by consumers. Consumers may learn to discern good firms from bad with experience and this may eventually drive out the bad firms. However, it also leads to enormous wariness in every transaction. Anonymous transactions, where the buyer and seller do not know nor have long-term interactions with each other - become impossible or extremely risky. This is an implicit entry barrier for new firms trying out innovative products - they will have to take significant efforts to signal credibility. Modern capitalism becomes less viable if fraud risk sits squarely with the consumer.
A private certification agency could mediate the "credibility" signal, offering a seal-of-approval as a safeguard against the risk of fraud. However, such private certification agencies are notably absent in India. The reasons for this lack of emergence remain unclear -- perhaps it is difficult to design viable business models within a price-sensitive and fragmented market. In the absence of a credit certification agency, a caveat emptor world means retail customers have no ex-post recourse, only their ex-ante judgment.
Option 2: The firm
Here, the company providing the goods or services is made directly and strictly liable for any fraud. Under Indian law, if a seller's fraudulent actions prevent or frustrate a buyer's due diligence, the seller cannot then turn around and claim that the buyer should have been more careful under the caveat emptor principle. This runs into trouble when customers are dealing with a fly-by-night operator. If the company commits fraud and vanishes, it becomes the domain of the police to pursue, locate, and prosecute the company's proprietors and courts to impose sanctions. If the company's resources are exhausted, there is no meaningful restitution to the consumer; sanctions may deter future fraud but do not compensate customer's losses. If the justice system doesn't work well or is not designed to deal with class action suits by a group of consumers, then this outcome is not too different from the burden being solely on the customer.
Option 3: The intermediary
In this set up, the intermediary, such as the payment aggregator, would act as a trusted third party. The burden of scrutinising legitimacy - of both buyer and seller - would rest on the intermediary. The intermediary may provide insurance to buyers (and sellers) against fraud, restoring lost funds where possible. The liability (at least in part) would lay on Worldline. We see an example of this in the credit card industry where the Fair Credit Billing Act in the United States requires credit card companies to investigate unauthorised transactions (or billing errors in the case of fraud) and transfer money back to customers if they report misuse of the card (or evidence of fraud) within a specified period of time.
In India, RBI requires payment aggregators to do due diligence of merchants it onboards. In the Falcon case, Worldline as the payment aggregator would have conducted due diligence of Falcon. A liability framework exists under the RBI as well, but only for unauthorised transactions. The applicability to instance of fraud remains unclear. If the RBI were to extend the liability framework to deal with fraud, similar responsibilities may get placed on payment aggregators, and other intermediaries.
At first glance, this is a better outcome for consumers. They are assured of the credentials of an anonymous provider of services and getting their money back in the event of fraud. This may increase the number of transactions that take place and the size of the market. However, protection comes at a cost. The intermediary firm will have to incur additional expenses and significantly change its business model. The firms may pass on the burden of anti-fraud compliance to customers in the form of higher platform fees, or stricter participation standards. But firms will also be incentivised to invest in measures to detect and block fraudulent transactions. We may see a consolidation in the intermediaries market with a few, large providers able to offer risk management at cost.
Conclusion
Instances of fraud create pressure upon the government to create an ex-ante regulatory system that makes many kinds of fraud infeasible through licensing conditions, price restrictions, and other regulatory barriers. But these conditions also make many kinds of products and transactions infeasible, which is not in the best interest of consumers and markets.
A well-designed regulatory system should first confirm that a complaint involves fraud, as not all losses are caused by fraud. It should then allocate this burden wisely. The Falcon case suggests that we are operating under the Option 1 scenario. The desirability of shifting to Option 3, with a significantly higher liability burden on the intermediaries, is an issue that merits immediate attention. A system that harnesses the interests of profit-seeking financial firms in blocking fraud is the one that has the best chance of success.
The author is a researcher at the TrustBridge Rule of Law Foundation.
