Handset Financing: Minimizing Risk, Maximizing Opportunities
As the wireless industry rapidly 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. Either customers would need to hand over $500-600 any time 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 to achieve the goal: getting 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 primary financing options for providing customers with no-contract plans:
- Rent-to-own: 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 establish a financing institution. 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.1 But chartering a bank is clearly a significant undertaking subject to regulatory approvals and requiring expertise often outside a mobile carrier’s domain. Carriers need to weigh whether or not it’s really necessary for their customer base.
- Partner with a bank or specialty finance company: Some wireless carriers have instead opted to partner with banks and other specialty finance companies 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 (following the financial crisis, banking regulators will mandate a substantial liquidity for chartering a de novo banking institution)? 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?
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.
Patrick Reemts is Vice President of Credit Risk Solutions at ID Analytics, Inc.
1. Okuttah, Mark and Juma, Victor (2012, September). Kenya: Safaricom takes on banks with micro-loans product. Business Daily Africa and Mahlaka, Ray. (2014, August 01). Vodacom relaunches M-Pesa. Retrieved from: http://www.moneyweb.co.za/moneyweb-technology-news/vodacom-relaunches-mpesa.