Business Issues

Pre-paid Communications Risks

Understanding and dealing with pre-paid service risks in the
Telecommunications, Media and Entertainment sectors

In the Telecommunications, Media and The issues

Entertainment sectors, products and services are
sold on both pre-paid and post-paid terms. Pre-
paid services bring a number of potential benefits
but many Service Providers operate under the
impression that pre-paid services are risk-free –
nothing could be further from the truth. There are a
number of risks and issues that need to be
considered and actively managed to assure good
profitability and customer experience.
The main issue in a highly-competitive market is
that of price-sensitive customer churn; price wars
lead to reduced profitability and can be almost
impossible to reverse. For start-ups, this can be
particularly challenging as competitors may
choose to operate at exceptionally low-margin to
retain market share and create a difficult
environment for new market-challengers.
Considering the challenges to profitability that
market conditions can bring, managing risk within
pre-paid service operations is essential to assure
the bottom-line. Most of these risks and issues are
within the control of the Service Provider, and are
therefore manageable to a significant degree.
Various estimates assess the potential for revenue
loss on pre-paid services to range between 3-11%
of revenue. Specific products may even go much
higher than that; one notable example
approaching 25% of revenues for specific data
services. Bringing a significant portion of these
‘lost’ revenues back into play might mean the
difference between success and failure of the
business.
Pre-paid services have certain advantages:
 Up-front customer payment helps cash-flow
and rem oves (c onsum er) credit
management overheads for the Service
Provider
 Tangible cost management for the customer
 Access to low-ARPU (Average Revenue
Per User) market segments in volume
enough to create decent profitability
 High-volume service penetration builds a
strong brand presence that can be
leveraged
 Guaranteed revenue for pay-per-use
services
There are disadvantages in many markets for both
the Service Provider and customer of pre-paid
over post-paid services which are generally higher
-ARPU and more feature rich. However, given the
benefits that high-volume market penetration
brings, pre-paid services are here to stay and are
likely to expand in service flexibility and offerings
over time. Ultimately, pre-paid may simply be
regarded as an option alongside post-paid where
service components and charges are equal, and
the payment method is left to customer choice.
Greater use of hybrid models will probably be a
forerunner to help manage payment-risk, e.g.
combining pre-payment for pay-per-use or
premium services on a post-pay account.

Managing churn whilst sustaining a profitable

service can be a major issue; even in markets
where hardware is ‘locked’ to the Service
Provider, unlocking services are just a few dollars
and any hardware subsidy applied hoping to

Business Assurance | Revenue Assurance | Fraud Management | Receivables Management

 Business Issues
Pre-paid Communications Risks
Understanding and dealing with pre-paid service risks in the
Telecommunications, Media and Entertainment sectors
generate loyalty is increasingly misplaced-
optimism (but does increase the overall size of the
market from which all Service Providers can
benefit). The grey-market for hardware is
omnipresent and is often considered an advantage
in boosting overall service utilisation, especially pre
-paid. However, as the regulatory grip tightens as
economies evolve, grey-markets will come under
increased pressure which may in turn place
pressure on profitability for the Service Providers.
What are the common problems
leading to pre-paid risk exposure?
Pre-paid is subject to similar revenue leakage and
cost exposure risks as post-paid. In fact, because
pre-paid often does not get the attention that pre-
paid does for Revenue and Cost Assurance within
a Service Provider, the losses can be significantly
higher overall. As there is often no billing system
per-se, many believe that the pre-paid cash
collected is all they need to worry about
(recovering cash from agents, credit-card issuers
etc. which also has its issues). This assumption is
fundamentally wrong!
All the components of post-pay exist in pre-pay
except the actual customer-billing part (and even
then some Service Providers may offer charge
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
statements or on-line access to usage charges).
Common issues include rating/charging data errors
in the pre-paid product or IN platforms, missing or
incorrect service subscription components (e.g. a
feature is being used but not charged), service
usage data integrity problems (e.g. different usage
periods/times recorded in different network
components), clock-misalignment on network
component and Operational Support Systems
preventing correct record stitching, processing rule
errors, inappropriate error-file management...the
list goes on. In reality, the fact that pre-paid is a
‘real-time’ value management service, consumers
will not allow reclaim of charges where errors are
detected by Service Providers post-use. The luxury
of a billing period to review and adjust
inconsistencies in billing data, or recover charges
from loyal customers, is simply not there; lost
revenue is usually lost forever.
A common misconception is that pre-paid services
are fraud-free. However, the opportunity for fraud
is significant and weaknesses will be exploited to
the full. Unfortunately, many risks are more easily
exploited by those with privileged access to the
service components; employees and service
partners.
There are several avenues for fraud including
security/integrity of the end-to-end value
management chain (e.g. value recharge numbers
may be made visible or generated and issued
without payment), pre-paid platforms or recharge
mechanisms may be open to adjustment of values,
voucher-packaging may allow theft of the recharge
codes, service partners might duplicate batches of
vouchers or numbers, service cloning, service-
platform or user-interface commands suppressing
value decrement on use etc. The risks are quite
extensive and detailed analysis of operations is
needed to identify and control those risks that can
be business-critical.
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 Business Issues
Pre-paid Communications Risks
Understanding and dealing with pre-paid service risks in the
Telecommunications, Media and Entertainment sectors
One of the more common issues, that may be
fraud or process failure, is that of pre-paid to post-
paid conversion of customer accounts. Where
customers are converted to post-paid in network
systems, but not made ‘billable’ within the post-
paid billing systems, there is a gap that is
sometimes not examined. In one case, major
internal fraud developed around this specific theme
resulting in 11% revenue loss.
And as more services become dependent on credit
-cards for payment (especially on-line), credit-card
(payment-card) fraud starts to have an impact and
charge-backs to the Service Provider offset
revenues.
How do you know if you have a
problem?
Unless you look specifically, often you will not find
out easily that there is a problem. However, broad
profitability analytics should provide indicators to
loss that should then be used as a basis for root-
cause analysis. Customer and agent complaints
should also be analysed to help identify potentially
systematic charging errors or fraud problems.
There are specific audit-points, reconciliations and
reports from platforms/systems that will help
identify specific issues and that may be
established at little or no cost to the Service
Provider. However, in-depth proactive scrutiny is
often required to identify specific risks and
controls. Including pre-paid as a high-priority in the
Business Assurance framework is a must.
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
Managing the problem
The first item on the agenda is to get pre-paid
recognised as a risk area. Unless there is an
acceptance of loss and potential gain to the
business, support to management control will be
hard to come by. Investigating some of the issues
outlined herein may help identify some specific
examples, but a full risk assessment is
recommended to really pin-down the problems and
devise cost-effective controls. However, common-
sense should prevail and a simple and structured
approach will generate good results.
Systems-automation of key aspects such as
Revenue Assurance or Fraud Management should
also be considered within the strategy – being a
real-time value service requires real-time detection
and response. Clearly, prevention should also
prevail and including appropriate inputs to the
design, build or change of pre-paid services is
essential to manage risk and control losses.
Given the thin margins that many pre-paid services
operate on, Business Assurance activities should
be considered fundamental to the operation.
Unprofitable or low-margin services can be turned-
around with a solid approach. Unfortunately, many
organisations will focus on market growth over
profitability; the answer is to balance both
acquisition and Business Assurance activities to
really bring in the value that is possible.
Please refer to the Services, Solutions and
Packages pages of our web-site for a more
detailed perspective of the components that might
be deployed within a strategic plan. Alternatively,
Contact Us to discuss your precise needs.