Some Prepaid Service Providers Face Cost Reduction Challenges

Should prepaid mobile service providers, in markets where manual airtime top-ups are the norm, move first to electronic top-up? The economics might seem straightforward. The market share and marketing implications are anything but simple, one might argue. 

There is not much doubt that electronic top-ups cost less than manual systems. 

The cost to a mobile service provider of refreshing mobile phone airtime using traditional prepaid scratch cards costs between 18 percent and 27 percent of revenue.

Refreshing airtime using electronic methods costs between three percent and 12 percent. 

The cheapest type of electronic top-ups uses bank cards, credit cards and automated teller machines.  The most expensive form of electronic top-up is operations conducted at convenience stores, supermarkets and other retail channels.

Strand Consult argues operators switching to electronic top-ups can boost earnings by three percent to five percent within three to six months.

But there are strategy implications as well, for the service provider that moves first in a market from scratch cards to electronic top-up, even if doing so reduces costs.

It is conceivable that such an operator could lose some customer share, especially when many or most consumers do not have ability to use credit cards, bank cards or ATMs.

So despite some operator concern about the end user impact of shifting to electronic top-ups, Strand Reports estimates a prepaid mobile service provider could improve earnings by shifting.

Telecom prepaid scratch cards are used to load prepaid mobile phone accounts, and use a personal identification number (PIN) covered by a scratch-off patch that the prepaid subscriber scratches off after buying the card.

The prepaid account is activated by calling an activation number and entering the PIN number.

Strand notes that at least some mobile service providers think they would suffer if they were the first, or only operator to switch to electronic top-ups, if a market where scratch cards are the norm.

Obviously, if many end users do not have the ability to use bank cards, credit cards and ATMs, an operator shifting to electronic top-ups stands to lose some market share. But there is little doubt increased pressure on revenue creates an incentive for prepaid service providers to contain costs.

Aside from lower per-minute revenue pressure and competition from voice and messaging products from Internet alternatives, service providers also face challenging churn conditions and fraud in the distribution system.

In principle, everyone likely agrees that it would be beneficial if prepaid service providers reduce top-up costs and churn while increasing average revenue per user.

The easiest solution, Strand Consult argues, is reducing top-up costs. Service provider executives might consider becoming a first mover in that regard risky, since the business value hinges on what other competitors decide to do.

If all competitors switch, then every supplier gains a margin advantage, and no single provider suffers. If not, there always is the possibility that one or more competitors could gain an advantage, by emphasizing that customers do not need a bank card, credit card or access to an ATM.

It’s a gamble prepaid providers should take, Strand Consult argues. Prepaid operators might not universally agree.