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Credit Risk and Bad Debt in Telecommunications

Credit Risk and Bad Debt in Telecommunications



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Published by AssuringBusiness
Understanding Receivables Management problems and solutions in the Telecommunications, Media and Entertainment sectors
Understanding Receivables Management problems and solutions in the Telecommunications, Media and Entertainment sectors

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Published by: AssuringBusiness on Mar 10, 2010
Copyright:Attribution Non-commercial


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Business Issues
Credit Risk and Bad Debt
Understanding Receivables Management problems and solutionsfor the Telecommunications, Media and Entertainment sectors
In the Telecommunications, Media andEntertainment sectors, products and services aresold on both pre-paid and post-paid (i.e. credit)terms. Where credit-terms are given, there areinherent risks to payment:
Those who (unintentionally) cannot afford topay (genuine bad-debt)
Habitual late payment
Those who can pay but refuse (maybe adissatisfied customer )
Those who have been deceptive and do notintend to pay (fraud)It is important to differentiate between these typesof payment risk as the way of dealing with themwill be quite different. Treating all payment risks ina similar way is a common problem and will leadto increased costs, reduced effectiveness of operations and disgruntled customers. All types of customer might fall into any of these categories
 Consumer, Corporate, SME etc. Identifying,preventing and managing exposure at the point of sale and throughout a customer lifecycle (throughbehavioural scoring/analytics) has to be constantlyin focus for a Service Provider to maintainmanageable debt levels.Increasingly, it is not only the level of credit riskexposure or bad debt that is in focus, but also theefficiency and effectiveness of the businessoperations, directly affecting operating costs. Awell-designed, thoughtful and innovativereceivables management process and operatingparameters will reduce credit risk, improve on-timepayments and recover more from the bad-debtprovision than the competition. In doing so,Service Providers create a distinct opportunity toallocate resources to other business needs, or simply reduce overall operating costs.Various benchmarking exercises havedemonstrated a common bad-debt to revenueratio range of between 1-
6%, with the ‘best
average’ position at around 2%. Some Service
Providers can get to the magic 1% threshold withsophisticated and pragmatic approaches to creditmanagement, but many jump between peaks andtroughs as they fail to align marketing and productmanagement activities with a sensible creditmanagement policy and operational plans.
Although pre-paid services are aimed atreducing credit-risk and targeted at certain marketsectors, there are a number of issues with pre-paid services that need to be managed
see our separate document on
The issues
To grow market share of the higher-ARPU(Average Revenue Per User) post-paid customer segment, many Service Providers areaggressively targeting both business andconsumer segments. The strategy has manypotential benefits:
Leveraging existing infrastructure such asmediation and billing systems, reducingaverage costs and improving margin(AMPU) potential.
Reducing attrition rates, allowing longer-term relationships and efficiencies inmanaging known-customers (e.g. tailoredcollection treatment plans).
Improved revenues through higher averageusage and cross-selling of products andservices that is easier with loyal customersand up-to-date contact information.
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
Business Issues
Credit Risk and Bad Debt
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
Understanding Receivables Management problems and solutionsfor the Telecommunications, Media and Entertainment sectors
However, in many cases, aggressive acquisitionhas led to risk management best-practices beingde-prioritised resulting in a substantial increase inbad-debt and fraud levels and the acquisition of more than expected lower-ARPU customersputting pressure on margins.Aggressive acquisition will often expose issues inmarketing, sales channels, credit-risk, collections,debt-management and fraud managementoperations that need to be addressed to reduceresultant bad-debt. Although the decline in theglobal and local economy will no doubt beaffecting the underlying delinquency rate, part of this bad-
debt will be also be ‘deliberate’, and may
therefore be considered as fraud and dealt withdifferently.Most Service Providers wish to balance debt
control with growth in their ‘good’ customer base.
Acquisition rates and customer experience need tobe balanced with risk controls both at the point of sale and during the customer lifecycle. Althoughsoftware systems will help automate operationsand should improve efficiencies (if done well), thecore policy, process, procedures and parametersapplied will dictate how effective any operation is.In a worst-case scenario, new systems can simplymake it easier to achieve higher bad-debt levels.
What are the problems leading tocredit-risk exposure and bad debt?
A common problem is that of non-alignment of themarketing, product management and financefunctions. Proactive cooperation is often neglectedthrough various other operational pressures,departmental business goals may sometimes beat odds with each other, and the receivables-management function might feel they are left tosuffer the consequences of an ill-conceivedservice launch or customer take-on strategy. For example, dealer or agent commissions might bepaid on sale-only terms and not related tocustomer usage or bill-payment, and may even notbe subject to claw-back conditions
a recipe for high bad-debt and fraud.However, a second very common cause is data-centric - integrity, retention and use of data acrossthe organisation. It is surprising how manyorganisations do not value the data they hold andpreserve its integrity throughout the business andcustomer lifecycle. For example, customers canchange contact details and this may not be passedthrough to the collections systems in time for collections activities to be correctly targeted.Errors in recording an address change might resultin failure to deliver a bill, resulting in unwantedcollections attention and quite possibly service

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