Callcredit Blog

Mobile World Congress blog series 2/2: Changing times

Credit Risk & Affordability Fraud & Verification

With Samsung being the latest original equipment manufacturer (OEM) to offer a form of monthly instalment or upgrade plan following their flagship Galaxy S7 device launch at Mobile World Congress (MWC), Callcredit takes a look at how the traditional subsidy model is changing and some implications for UK operators.

In the traditional device subsidy model the consumer enters into a two year plan with the carrier who offers bundles a monthly subscription for network access together with the cost of the device.  As smart devices have become more sophisticated and therefore more expensive, operators have begun to remove the subsidy and introduce instalment & finance plans as an alternative means to finance this cost.    This also gives flexibility to consumers who can upgrade devices more frequently or keep the same device at the end of term and pay just for the network access.

Ultimately the new models (according to results of US carriers such as AT&T) deliver better margins, lower churn, lower acquisition cost and improved operating cash flow to carriers.

The cost of spreading the cost

At the end of 2015 CCS Insight predicted that many European operators will move away from offering subsidised devices in 2016, instead offering finance plans that separate the device and the airtime contracts into two agreements.

In the U.K. this has been the model adopted by O2 Refresh, Tesco Mobile Anytime Upgrade and Virgin Mobile Freestyle contracts for some time.  Consumers like the flexibility and networks like the positive impact removing the subsidy has in their accounting practices.  It is expected that the other UK carriers are likely to introduce similar schemes.

However, this is not a straightforward task for a variety of reasons.

The device finance is classed as an unsecured loan regulated by the Financial Conduct Authority (FCA).  Carriers already feel that they are heavily regulated elsewhere and the FCA requirements are rightly far reaching for them to implement, particularly in the context of multiple customer relationships;

  • This further strengthens the need for a robust single customer view as telecoms organisations offering consumer credit, for device purchase on finance, need to adhere to affordability and treating customers fairly rules throughout the full customer lifecycle.
  • This can only be strictly achieved by having the ability to reconcile all relationships with the customer and understand the risk profile, particularly where operators are offering converged services.
  • At the same time, Telco’s have the challenge of being able to assess this real time, determine the next best action and provide a seamless experience for their customers.
  • Furthermore, organisational obstacles exist as the ‘ownership’ of customers maybe fragmented across P&L accounts, for example, siloed at a product portfolio level.
  • Implementing affordability and treating customers fairly requirements across huge organisations that are new to this type of regulation comes with an operational cost.

OEMs such as Apple, offer finance plans themselves.

  • This means a consumer could walk into Apple, choose a device, network and tariff without interacting with the carrier at all.
  • Clearly, this strengthens the brand relationship with the device manufacturer and threatens any loyalty to the carrier.
  • Therefore there is a risk to the carriers that they cede control of the customer relationship to OEMs.

Ultimately, consumers demand flexibility and transparency and operators need to provide both against a backdrop of complex regulatory requirements coupled with credit risk quality and affordability assessments.

Author: Mel Prescott

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