There is a three-way tension at the heart of every payments operation – and getting it right is the difference between growing revenue and growing profit. If it sounds simple, I can tell you from roughly a decade working on this problem – it isn't.
You could break it down like this:
Accept more payments and you'll accept more fraud. Block more fraud and you could block real customers, too. Cut processing costs by skipping validation and both problems get worse.
How to improve profitability varies from business to business. Only you can decide exactly what to prioritize based on your lines of business, risk appetite, and the resources you have available. But if you get it right, you can maximize profitability through carefully crafted payments strategy.
The best-performing payments teams combine strategic thinking and state-of-the-art machine learning models to find the best way forward.
Improving the contribution margin on your payments
For the sake of simplicity, let’s think of payments like this:
Revenue - (fraud losses + processing costs) = contribution margin
To make this concrete: a merchant processing $200M annually with a 1.5% fraud rate and 2.4% processing costs is spending roughly $7.8M on fees and fraud losses. Improving fraud accuracy by 20 basis points and optimizing processing costs by 15 basis points would recover approximately $700K in annual profit.
Processing costs are made of multiple costs, including interchange fees which are set by schemes (such as Visa, Mastercard or Discover), and not your payment services provider.
My colleagues regularly publish guidance on optimizing payment costs, which we know is an important priority for competitive merchants. Keep reading for more cost-saving guidance.
Learn more: 8 ways to optimize interchange and network fees
Accepting what’s right – without frustrating customers
Logically, you know you cannot accept 100% of payments – as well as potential fraud, some payment requests will contain incorrect card details, the user won’t have sufficient funds or the account is closed. You’ll likely have to refund fraudulent payments or pay to dispute the charge. So it doesn’t make sense to aim for total payment acceptance. You’ve got to keep an eye on that contribution margin. That’s why conversion is so important.
Did you know roughly half (45%) of shoppers abandon purchases due to frustrating digital experiences? From the customer’s point of view, they want a quick and easy way to buy your products, fund their online account or book that time-sensitive service (to name a few examples). User experience (UX) is a top priority for competitive merchants. It’s vital for customer satisfaction, brand loyalty, customer stickiness and, of course, revenue.
My engineering counterpart Guillaume Merindol, puts it like this: “Merchants often want to minimize friction for the user and maintain really good UX – but sometimes that gets in the way of acceptance rates. If you skip payment validation steps, such as agreeing to fulfil the order and taking payment later or skipping Strong Customer Authentication, it can get in the way of higher performance. Those payments may not turn into revenue if they’re blocked for fraud or the issuer finds another reason not to validate the payment.” He’s drawing out the revenue risk of a higher acceptance rate: just because it was easy for your customer to place the order, doesn’t necessarily mean that’s a win for your business.
Guillaume adds: “UX is still really important, so we want to make sure payment security doesn’t get in the way of positive interactions with your brand. That’s our job, and the balance we have to keep in mind.”
Instinctively, you know user experience is important, and you may already have taken steps that reduce friction and boost conversion at checkout. Here are two more techniques to achieve that:
Pre-authorization solves for variable billing amounts
Depending on your exact business model, you can also reduce potential frustration by taking a pre-authorization charge as a way of temporarily holding funds when the final billing amount is not yet known. This is really useful in the hospitality, hotel, and transport industries, where the customer is ready to use the service but the final payment amount depends on a few unknowns, such as the exact duration of a cab journey.
Partial authorization prevents cart abandonment
In other instances, such as the purchase of groceries, fashion apparel or gifts online, your customer may find their chosen payment method has insufficient funds. As a merchant, you may be willing to accept payment via more than one method so that you don’t lose the sale. For example, you can submit partial authorization on a debit card, then accept the remaining balance via a credit card.
Another influence on margin is the cost of payments. Let’s think more specifically about bringing costs in line.
Cost savings on fees from card brands
Earlier I mentioned the interchange fee, which is one of your greatest costs in payment processing. It’s not an optional fee, and it’s collected on every single payment. The rates vary according to very specific features of the payment, such as the type of card the customer is using, the location of your business, the location of the customer’s bank, and dozens of other criteria.
What that means is there’s often room for improvement in the way a payment request is formatted, which can affect the fee category it falls into. At scale, this can mean millions of dollars, euros or yen saved.
Example: Including an additional data field can save $0.10 on certain payments in the US. We saved one of our merchants $2 million in processing fees in 2025 thanks to such a strategic improvement.
Action point: Consult with a technical payments expert to analyze where you could optimize card processing costs. This may involve making changes to your data collecting, payment message formatting, or another type of collaborative project.
In addition to cost savings, you need a fraud strategy that’s fit for purpose. This is vital to ensure you’re retaining the revenue you should.
Tweaking fraud prevention strategy
We covered first-party fraud – also known as customer fraud – in our deep dive on friendly fraud which particularly affects the profitability of retail and ecommerce merchants around holiday season.
A payment request can be flagged as fraudulent (and, therefore, blocked) at various stages; after your own fraud analysis, the acquirer, the issuer or even the card scheme may decide it should be blocked.
When it comes to improving acceptance by the issuers, you need to show them that your payment traffic is consistently trustworthy – i.e. that you don’t routinely accept payments later flagged as fraudulent. To achieve this, you should refine your fraud systems to improve accuracy before the payment is sent for issuer approval. If you can improve your ability to detect payments likely to be fraudulent, then by the time requests reach the issuer, they have been carefully filtered for suspicious signals.
Improving the trustworthiness of your payment traffic is an important way to increase issuer approval rates – and save costs from failed authorization attempts.
Lifting specific blocks triggered by an issuer suspecting fraud
Sometimes you will face payment declines that are flagged as fraudulent, even when the payments are safe and trustworthy. The reason is that no fraud detection system is perfect. From time to time, the data that issuers are using to make a decision on your payment traffic will be out of date.
As an individual merchant, it can be almost impossible to persuade an issuer that your payment traffic is trustworthy if the issuer has decided otherwise. The resources you’d need for data-collecting, analysis, and cleaning – not to mention finding the right contact at the issuing institution, and convincing them to accept more of your payments – are significant. That’s why it pays to have a trusted partner advocate on your behalf.
Example: A major retail group in the MENA region recently faced issuer declines under “suspected fraud” because of a historic suspicion that the merchant was high risk. The Checkout team intervened on the merchant’s behalf, and reassured the Saudi issuer that the merchant had improved fraud rates. This led to the issuer recalculating the merchant’s risk profile, lifting the block, and immediately recovering the lost processing volume from that point. The result was a 15.8% acceptance rate uplift in traffic to this issuer.
Action point: Fraud needs careful attention, particularly as issuer preferences, criminal techniques, and user behaviors will continue to change over time. Ensure you are building a cost-effective business by educating yourself on the latest fraud prevention techniques.
Balancing revenue and costs with Checkout.com
As your business grows in scale, you need to consider this equation more carefully: what is the appropriate balance between accepting more payments, the cost of each transaction, and keeping fraud to a minimum? Ask if your strategy needs to change in favor of profitability. And don’t feel you need to do this alone – check in with your payments partner to see if there’s more to be done on improving your cost-to-revenue ratios. For instance, Checkout.com's Intelligent Acceptance uses machine learning and live network data to balance fraud, acceptance, and cost-effective payments routing, according to your priorities.
Depending on your sector, its natural fraud rate, and your desire to invest and pivot according to newly available technology, the right next steps will vary. Keep an eye on the Checkout.com blog for more advice on optimizing payments, and talk to your payments services provider for more ideas on strengthening profitability.
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