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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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Published by: AssuringBusiness on Mar 10, 2010
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10/16/2012

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1
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
2
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
‘real
-
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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