This article originally appeared in the Day 2 edition of the Super Mobility Official Show Daily.
As the wireless industry moves toward a different economic model, companies are exploring the use of financial partners to offload the risk of handset costs. Post-paid subsidized phones are still a customer favorite, but are not feasible for the entire customer base – and there’s nothing that hurts sales more than having to ask a customer in your store to shell out a deposit and pay full price for a smartphone.
But how do you successfully transition from being a carrier to being a financing instrument for your end customer? Do you partner? Do it yourself? What do collections operations look like? Do you share billing? To answer these questions and develop best practices, it’s helpful to reflect on how the rush to this new economic model came to be, and why it’s taking off with such vigor among consumers.
Disrupting the market
T-Mobile made a huge splash when it debuted no-contract plans last year, a true market disruption that had other carriers rushing to come up with their own alternatives to traditional contract-based plans. With the popularity of the plans surging, it became clear that carriers would need to compete on that level to draw in and retain customers.
The new model, however, meant that carriers would no longer have a two-year revenue stream to help subsidize the cost of the handsets. The choices were clear: either customers would need to hand over $500-$600 anytime they wanted a new phone (unrealistic for most, and a strategy that would cause carriers to lose customers rapidly), or carriers would need to come up with more affordable options. The goal is to get the customer in and out of the store with a handset and a plan at a reasonable up-front cost.
What are the options?
U.S. carriers generally find themselves with three financing options for providing customers with no-contract plans:
Rent-to-own: Because it’s technically not credit and therefore not subject to the many rules and regulations that credit entails, rent-to-own is an option that is relatively low-risk for carriers. The downside for customers is that they often end up paying more for the phone over time than what it’s actually worth.
Charter a bank: Carriers who want to help customers finance the phones themselves may decide to start a bank. This approach, while new and unconventional, has seen success abroad – Safaricom and Vodacom’s M-Pesa, for example, started in Kenya in 2007 to provide mobile money transfer and microfinancing services. But chartering a bank is clearly a significant undertaking that requires expertise often outside a mobile carrier’s domain. Carriers need to weigh whether or not it’s really worthwhile for their customer base.
Partner with a bank: Some carriers have opted, instead, to partner with banks to offer their customers financing services. But partnering isn’t without its complexities – carriers and banks need to come to an agreement on how to share credit risk responsibility and how to carry out the collections process, from an operations standpoint.
How do carriers choose?
With all the options that exist for financing, carriers need to look at some core areas to help them determine which route they want to go. At a high level, it’s all about weighing the chosen economic model with the risk involved to determine whether or not the carrier has the resources to handle the new approach. If a carrier wants to charter a bank, what’s its ability to invest liquid cash into it? Does it have the legal resources available (with telecommunications domain expertise) to move forward with the chosen approach? Does the carrier have proper counsel to help them pick a bank partner that makes the most sense for their business?
Once a business model is settled upon, the questions carriers need to ask themselves become more operational in nature – nuanced but hugely impactful on how successful the model ends up being (e.g., Who owns the credit policy? Who owns collection? Who owns billing?) With the no-contract model in its relative infancy as a widespread, mainstream option for customers, there’s no clear-cut blueprint for how carriers can operationalize the financing route they choose to provide – but leaning on data for support has proven effective.
The devil is in the data – operationalizing the model
Before the no-contract trend took off, carriers were still vetting potential customers’ creditworthiness – the risk involved with potential loss associated with the handset cost remained, which was built into the standard two-year contract. Now, assessing for risk is much more complex because it’s not only for the cost of the handset and two-year contract. Carriers have to take into consideration whether or not the customer will opt for a no-contract plan, and if so, whether or not the carrier/financing company (if there is one involved) is comfortable taking on any potential risk the customer brings.
In the instance of more complicated models where carriers need to consider more factors, it’s even more important for them to look at both traditional credit and alternative credit data such as monthly transactions for pay TV, wireless, and high-speed Internet services. Applying advanced analytics to this unique view of consumer risk helps verify more identities, catch more fraud and reduce deposits to safely convert more legitimate applicants into paying customers.
Ultimately, the future of success in handset financing largely depends on the carrier’s choice of financing and how that translates to current and existing customers. The goal is to obtain low-risk, net-incremental customers, while reducing the churn and equipment loss that comes with fraud and bad credit risk. Sourcing both traditional and alternative data will help carriers get there.
Patrick Reemts is vice president of credit risk solutions at ID Analytics.
