This content was paid for and produced by Riskified in partnership with the Commercial Department of the Financial Times.

Balancing risk and reward is second nature to CFOs, particularly when navigating the intricate world of card-not-present (CNP) payment fraud. The risk takes the form of chargeback costs incurred for approving fraudulent payments, and the reward is optimizing revenue (and customer goodwill) by approving as many valid orders as possible. But many digital merchants land on a risk/reward balance that leaves CFOs uncomfortable.

To suppress chargeback risks, online sellers tend to set conservative approval rules, increasing the likelihood of false declines (declining a legitimate purchase). Roughly 16 percent are false declines, according to research published by Experian, resulting in $11bn in lost sales annually – an enormous bite out of revenue. What’s more, the value of a declined order is on average 1.6 times higher than the average approved purchase.

So, in attempting to solve a fraud problem, the organization inadvertently creates a profitability problem, one that saps a significant chunk of total revenue from the average enterprise ecommerce merchant. Plus, over-declining not only leaves money on the table, it can also damage relationships with loyal customers.

Push-pull between fraud costs and revenue generation

In an ideal world, merchants could simply approve the good orders and decline the bad. But because of the dynamic nature of fraud – basically a daily cat-and-mouse game played against millions of bad actors – this classification problem remains unsolved. This is why bad actors keep turning to CNP fraud as a day job, and making a sizable living off it.

Therefore, chargeback costs and revenue optimization are in constant tension. The merchant is stuck between a rock and a hard place: they pay chargebacks if they approve bad orders; they lose money if they decline good ones.

The only way out of this conundrum is for merchants to shift the financial burden of chargebacks and approval rates to an accountable fraud partner. Once the merchant enters into this partnership, the rules of the game change completely.

Shift accountability, improve profitability

An accountable partnership is built on two essential elements that eliminate financial trade-offs for the merchant:

  • The first is a chargeback guarantee, which offloads all chargeback costs to the partner.
  • The second is an approval rate guarantee that provides a revenue baseline on the merchant’s revenue.

With these two mechanisms in place, the partner is contractually obligated (and financially motivated) both to keep chargebacks low and to maintain approval rates at or above the agreed level. These guarantees not only grow a merchant’s profitability, but they also do so in a completely predictable way. This added control and predictability frees the organization to take a more aggressive stance toward growth opportunities and expansion.

With fraud costs essentially fixed, for example, there is less downside potential to entering a lucrative new market that may have vastly different fraud patterns and buying behaviors. The accountable partner is financially obligated to maintain service levels in the new environment. And with a chargeback guarantee in place, the merchant doesn’t have to worry about a devastating flood of new chargebacks from some novel attack.

How one airline spread its wings

When Air Europa first pivoted to an online strategy, the airline saw a significant revenue boost from digital sales. But that success also made them a target for fraud, which resulted in higher chargeback rates and a costly stint in Visa’s chargeback program. To regain control, their team began working with an accountable fraud partner that took on liability for their chargebacks while guaranteeing a minimum approval rate.

According to a case study conducted by ecommerce fraud and risk partner Riskified, the new strategy for Air Europa immediately led to a 15 percent lift in approval rate, eliminated all chargeback costs and reduced chargeback rate by 95 percent, which kept the airline out of issuer programs.

With added revenue and far greater cost stability, Air Europa was able to comfortably expand its flight routes, generate additional revenue from new markets, and change its mindset from that of a local flier to a global player without subjecting themselves to additional fraud risk or taking on more costs of prevention.

Taking risk off the table puts profitability front and center

In an accountable partnership model, chargeback costs are close to zero, and the merchant is free to negotiate the approval rate and per-approval fee that works for them. Instead of a risk/reward guessing game, fraud management becomes a fairly straightforward math exercise toward profitability.