The Pricing Death Spiral in Payments
FX & Float Memo #3
Prices in cross-border payments are falling. There are two completely different reasons why this is happening.
Some companies have found structurally cheaper ways to move money. Better banking integrations, more efficient treasury models, lower-cost infrastructure. Their prices are lower because their costs are lower. This leads to a permanent market shift, and it is healthy. This memo doesn’t cover this scenario.
The second is when a payments company prices aggressively to win a customer. The strategy works, and the customer comes on board. As the relationship progresses, the margin on the customer comes under strain. The company tries to widen the FX markup or increase the fees to maintain its margin. The customer notices, shops around, and threatens to leave. The company offers a discount to keep them. The margin gets worse. The customer has learned that threatening to leave gets them a better deal.
This is the pricing death spiral. When a company is in this cycle, every step feels rational when taken individually. But collectively, it degrades margins, trains customers that behaving adversarially is better for them, and leaks competitive intelligence. Most payments companies inevitably get caught in this cycle now and do not recognise it as a pattern.
How the spiral starts
The spiral always begins with a rational decision: win the customer.
Suppose the payments company is competing for a mid-market customer doing $2 million per month in cross-border volume across three corridors. The customer is evaluating between two providers. The sales team knows the standard rate card will not win the deal, because the competitor is quoting lower. So the company offers a custom rate: a reduced stated fee, a tighter FX spread, or both. They win the deal.
This is a commercial win. But two things that will matter later have happened in parallel.
First, the customer was acquired at a margin that assumes their volume will grow. The pricing was justified internally with a note that says something like, “at $3 million monthly volume, this customer becomes profitable at these rates.” So, the customer’s current volume does not support the margin. And the future volume is a projection, not a commitment.
And projections, more often than not, do not materialise. Six months later, the customer is still at $2 million. The company now has a choice: either enforce the pricing terms contingent on the volume commitment or accept the current rate and absorb the margin gap. In theory, the company should enforce. In practice, no company actually does. Losing $2 million in monthly volume to enforce a pricing condition is a decision no commercial team wants to make. So the unsustainable rate becomes the permanent rate.
Second, the customer now has an anchor price. They believe this is what the service costs. Any future increase will be measured against this number, regardless of the growth assumption it baked in or whether it was sustainable for the company.
How it escalates
Six to twelve months pass. Now the customer’s volume has grown, but not to the projected level. The margin on the account is thin or negative. The company’s finance team flags it. The pricing committee reviews the account and decides to adjust the rate.
They make a small adjustment – maybe a modest increase in fees, or a few basis-point increase in the FX spread. They expect the customer will absorb this increase without noticing or complaining, because the new rate is still very competitive.
But the customer does not evaluate this new rate in absolute terms. They evaluate it relative to the anchor. Let’s say they were paying 0.1% fees. Now it is 0.15%. That is a 50% increase in their FX cost, even though the absolute difference is just 5 bps. This increase versus the anchor is what they discuss internally.
The customer starts looking for other options. They are now very aware of their pricing, which they weren’t earlier. The price increase, which was meant to fix a margin problem, has created a retention problem.
The discount trap
The customer calls their account manager. They have received a quote from a competitor. The quote may be real or fabricated, but it does not matter. The threat of losing the customer is now on the table.
The account manager escalates to get a pricing exception. The company now faces a choice: hold the new rate and risk losing the customer, or offer a retention discount and keep the volume.
Most payments companies choose the discount. The logic is simple: compare the cost of acquiring a new customer to replace this volume to the cost of the discount. The unit economics, evaluated in isolation, favour retention.
But the discount does five things that the unit economics do not capture.
First, it confirms to the customer that the original price increase was negotiable. Every future increase will now be met with the same behaviour: threaten to leave, wait for the discount. The company has trained the customer to negotiate using threats.
Second, it signals to the customer that the company’s stated pricing is not its real pricing. The customer now knows there is a gap between the rate card and what the company is willing to accept. This is the same transparency problem discussed in Memo #1, but created by the company itself.
Third, it leaks pricing intelligence to competitors. The customer can use the retention discount to further negotiate with a competitor. “This provider is offering 0.1% rate plus a cashback. Can you match this?” The competitor now knows the company’s floor price and can use it in future deals.
Fourth, it creates an internal precedent. The next time any account manager faces a similar situation, they will also expect this exception. This makes discounting the default response to any churn risk.
Fifth, the discount does not stay private. This is less understood by most companies, and they treat each pricing deal as a confidential concession to that customer. But in concentrated verticals like e-commerce or SaaS platforms, customers are a small, tight-knit community. They talk to each other, meet at industry events, and are part of the same WhatsApp groups. When one customer gets a discount, others will find out. They then follow the same playbook: threaten to leave, provide the new quote and get a discount. The company has set a new price expectation for the segment.
The structural damage
This spiral, once it catches on, spreads through the portfolio from both ends, i.e., new customer acquisition and existing customer retention.
On the retention side, the pricing floor keeps dropping. Each discount becomes the new reference point for the next negotiation. Customers who were never planning to leave start asking for pricing reviews because they have heard that others received better terms. The account management team spends more and more time on pricing discussions and less time on growth conversations.
On the acquisition side, the sales team is acquiring new customers at increasingly aggressive rates due to the tight competitive environment. The new customers come in at lower margins than the existing ones, which means the portfolio’s blended margin is declining from both directions: existing customers negotiating down and new customers being acquired cheaply.
When the finance team sees this drop in margin, they attribute it to “competitive pressure.” This is only partially correct. The competitive pressure is a cause, but the company’s response to it is accelerating the damage.
Why is the spiral hard to stop
The pricing death spiral is self-reinforcing because each step in the cycle creates the conditions that aid the next. Aggressive pricing to win a deal means thin margins. Thin margins force price adjustments eventually. Price adjustments trigger customer awareness. Awareness leads to shopping. Shopping leads to churn risk. Churn risk leads to discounts. Discounts reduce the margins further.
Breaking out of this cycle is difficult because it requires a company to accept short-term pain for long-term structural health. Specifically, it requires three things that most payments companies resist:
The first is walking away from deals that require unsustainable pricing. If a customer can only be won at a margin that depends on projected volume growth to be sustainable, the company is not pricing the current deal, but a forecast. And as described above, when the forecast does not materialise, the company never enforces the original terms. The temporary rate becomes permanent.
The second is holding the price when a customer threatens to leave. It is hard to maintain discipline here. The immediate loss of volume is visible. The structural benefit of pricing discipline is invisible and long-term. Every payments company knows this, but ends up making frequent exceptions.
The third is separating acquisition pricing models from retention. Most payments companies use the same pricing logic for both. The rate at which a customer was acquired becomes their forever rate. However, building pricing logic with a clear, well-communicated path from introductory to standard rates, with transparent triggers for the customer at each step, removes the fuel for the spiral.
When the market itself shifts
This is where the company’s own decisions drive a spiral. There is a worse version: when the market itself reprices structurally.
This happens when a competitor finds a way to operate at permanently lower costs. Maybe they have built direct integrations with local banks that bypass correspondent banking fees. Maybe they have a treasury model that allows them to pre-fund corridors more cheaply. Maybe they are a new entrant with a different cost structure, funded by venture capital that is willing to subsidise growth, or built on infrastructure that is genuinely cheaper to run.
In these cases, the competitor is not offering a tactical discount to win a deal. They are operating at a price point that the incumbent cannot match without restructuring its own costs. This is a structural repricing of the market, fundamentally changing market dynamics.
When the competitive threat is tactical (a one-off discount to win a customer), the company can hold its price and take a bet that the competitor will not continue to play the discounting game. When the competitive threat is structural (a permanently lower cost base), holding price means losing customers steadily, and matching price means operating on margins the business was not built to support.
When the shift is structural, it becomes an existential problem. The company is now operating in a market with a price point that compresses its margins to unsustainable levels. The playbook that worked for tactical competitive pressure (hold price, add value, deepen integration) does not work after the market has repriced.
At this point, the company needs to either restructure its costs or find a way to justify a premium through product differentiation. Neither of these is quick or easy.
What this means for the company
The pricing death spiral is a structural problem that shows up in pricing decisions. It can be avoided by thinking about it structurally.
The companies that successfully avoid it share three characteristics. First, they build enough product stickiness (through integration depth, settlement dependency, and corridor coverage, as discussed in Memo #2) that makes switching expensive for the customer. When switching is expensive, the customer’s decision is no longer driven by who offers the lowest rate. The company can price based on the value it delivers, rather than reacting to any number a competitor puts on the table.
Second, they treat pricing as a product decision, governed by rules and architecture, rather than a commercial decision, governed by negotiation and discretion. When pricing sits with the sales team, every deal becomes a one-off negotiation. When pricing sits with the product team, it becomes a system with logic that holds across customers.
Third, they have the discipline to let customers leave when the economics do not work. This is the hardest of the three, but it is important for escaping the spiral.
The companies stuck in the spiral share a different set of characteristics. Their sales team has more pricing power than their product team. Their retention strategy almost always is a discount. And their margin compression is explained as ‘market dynamics’.
A payments company that cannot spell out, for any given customer, the margin at acquisition, the margin today, and the trajectory of that margin over the next twelve months does not have a pricing strategy. They are conflating pricing strategy with a series of negotiations. And negotiations, without a structure, tend to spiral.