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Prepaid Risks

Prepaid Risks

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

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Categories:Business/Law, Finance
Published by: AssuringBusiness on Mar 10, 2010
Copyright:Attribution Non-commercial


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Business Issues
Pre-paid Communications Risks
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
Understanding and dealing with pre-paid service risks in theTelecommunications, Media and Entertainment sectors
In the Telecommunications, Media andEntertainment sectors, products and services aresold on both pre-paid and post-paid terms. Pre-paid services bring a number of potential benefitsbut many Service Providers operate under theimpression that pre-paid services are risk-free
 nothing could be further from the truth. There are anumber of risks and issues that need to beconsidered and actively managed to assure goodprofitability and customer experience.The main issue in a highly-competitive market isthat of price-sensitive customer churn; price warslead to reduced profitability and can be almostimpossible to reverse. For start-ups, this can beparticularly challenging as competitors maychoose to operate at exceptionally low-margin toretain market share and create a difficultenvironment for new market-challengers.Considering the challenges to profitability thatmarket conditions can bring, managing risk withinpre-paid service operations is essential to assurethe bottom-line. Most of these risks and issues arewithin the control of the Service Provider, and aretherefore manageable to a significant degree.Various estimates assess the potential for revenueloss on pre-paid services to range between 3-11%of revenue. Specific products may even go muchhigher than that; one notable exampleapproaching 25% of revenues for specific dataservices. Bringing a significant portion of these
‘lost’ revenues back into play might mean the
difference between success and failure of thebusiness.
The issues
Pre-paid services have certain advantages:
Up-front customer payment helps cash-flowand removes (consumer) creditmanagement overheads for the ServiceProvider
Tangible cost management for the customer
Access to low-ARPU (Average RevenuePer User) market segments in volumeenough to create decent profitability
High-volume service penetration builds astrong brand presence that can beleveraged
Guaranteed revenue for pay-per-useservicesThere are disadvantages in many markets for boththe Service Provider and customer of pre-paidover post-paid services which are generally higher-ARPU and more feature rich. However, given thebenefits that high-volume market penetrationbrings, pre-paid services are here to stay and arelikely to expand in service flexibility and offeringsover time. Ultimately, pre-paid may simply beregarded as an option alongside post-paid whereservice components and charges are equal, andthe payment method is left to customer choice.Greater use of hybrid models will probably be aforerunner to help manage payment-risk, e.g.combining pre-payment for pay-per-use orpremium services on a post-pay account.Managing churn whilst sustaining a profitableservice can be a major issue; even in markets
where hardware is ‘locked’ to the Service
Provider, unlocking services are just a few dollarsand any hardware subsidy applied hoping to
Business Issues
Pre-paid Communications Risks
Business Assurance | Revenue Assurance | Fraud Management | Receivables Management
Understanding and dealing with pre-paid service risks in theTelecommunications, Media and Entertainment sectors
generate loyalty is increasingly misplaced-optimism (but does increase the overall size of themarket from which all Service Providers canbenefit). The grey-market for hardware isomnipresent and is often considered an advantagein boosting overall service utilisation, especially pre-paid. However, as the regulatory grip tightens aseconomies evolve, grey-markets will come underincreased pressure which may in turn placepressure on profitability for the Service Providers.
What are the common problemsleading to pre-paid risk exposure?
Pre-paid is subject to similar revenue leakage andcost exposure risks as post-paid. In fact, becausepre-paid often does not get the attention that pre-paid does for Revenue and Cost Assurance withina Service Provider, the losses can be significantlyhigher overall. As there is often no billing systemper-se, many believe that the pre-paid cashcollected is all they need to worry about(recovering cash from agents, credit-card issuersetc. which also has its issues). This assumption isfundamentally wrong!All the components of post-pay exist in pre-payexcept the actual customer-billing part (and eventhen some Service Providers may offer chargestatements or on-line access to usage charges).Common issues include rating/charging data errorsin the pre-paid product or IN platforms, missing orincorrect service subscription components (e.g. afeature is being used but not charged), serviceusage data integrity problems (e.g. different usageperiods/times recorded in different networkcomponents), clock-misalignment on networkcomponent and Operational Support Systemspreventing correct record stitching, processing ruleerrors, inappropriate error-file management...thelist goes on. In reality, the fact that pre-paid is a
time’ value management service, consumers
will not allow reclaim of charges where errors aredetected by Service Providers post-use. The luxuryof a billing period to review and adjustinconsistencies in billing data, or recover chargesfrom loyal customers, is simply not there; lostrevenue is usually lost forever.A common misconception is that pre-paid servicesare fraud-free. However, the opportunity for fraudis significant and weaknesses will be exploited tothe full. Unfortunately, many risks are more easilyexploited by those with privileged access to theservice components; employees and servicepartners.There are several avenues for fraud includingsecurity/integrity of the end-to-end valuemanagement chain (e.g. value recharge numbersmay be made visible or generated and issuedwithout payment), pre-paid platforms or rechargemechanisms may be open to adjustment of values,voucher-packaging may allow theft of the rechargecodes, service partners might duplicate batches ofvouchers or numbers, service cloning, service-platform or user-interface commands suppressingvalue decrement on use etc. The risks are quiteextensive and detailed analysis of operations isneeded to identify and control those risks that canbe business-critical.

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