Pay as you go (phone)
Encyclopedia
A prepaid mobile phone is a mobile phone
for which credit is purchased in advance of service use. The purchased credit is used to pay for mobile phone services
at the point the service is accessed or consumed. If there is no available credit then access to the requested service is denied by the mobile phone network
. Users are able to top up their credit at any time using a variety of payment mechanisms.
The alternative billing method (and what is commonly referred to as a mobile phone contract) is the post-paid mobile phone
, where a user enters into a long-term billing arrangement with a mobile network operator
or carriage service provider (CSP).
by a mobile phone operator, although the charges for these services may differ from customers with the same operator who have a postpaid contract
.
In addition, a prepaid phone has a balance which can be queried at any time, and also topped up periodically. Examples of ways in which the balance can be topped up are the following:
Credit purchased for a prepaid mobile phone may have a time limit, for example 90 days from the date the last credit was added. In these cases, customers who do not add more credit before expiration will lose their remaining balance.
There is no compulsion on a prepaid mobile phone user to top up their balance. To maintain revenues, some operators have devised reward schemes designed to encourage frequent top ups. For example, an operator may offer some free SMS
to use next month if a user tops up by a certain amount this month.
Unlike postpaid phones where subscribers have to terminate their contracts, it is not easy for an operator to know when a prepaid subscriber has left the network. To free up resources on the network for new customers, an operator will periodically delete prepaid SIM cards which have not been used for some time, at which point their service (and its associated phone number) is discontinued. The rules for when this deletion happens varies from operator to operator, but may typically occur after 6 months of non-use.
By 2003 the number of prepaid accounts grew past contract accounts, and by 2007, two thirds of all mobile phone accounts worldwide were prepaid accounts.
when larger markets were being sought after by the mobile phone operators. Before this date, all mobile phone
services were offered on a post paid basis
, which excluded people with a poor credit rating
.
. These limitations are often due to the complexity of managing the credit system for high price calls, or when users are not on their home network.
s which are always allowed). In the US incoming calls are also barred. In some other countries, a prepaid mobile with zero balance may still receive calls and texts.
This results in an "on/off" or "all or nothing" proposition for the prepaid service providers and their clients (that is, the account either has enough credit to use the phone, or it does not). Some operators (for example Orange) allow their pre-pay customers to have a small negative balance to allow short calls or texts when the customer’s credit has been completely used. This is then deducted when the customer next adds more credit.
The time most likely for a prepaid customer to switch to a different service provider is when the prepaid account reaches a "zero credit balance". Like other service providers, mobile service providers losing a mobile account call it "churn."
onto other GSM networks when using the phone abroad. This was because the operator had no way to bill calls in real time from another network.
However, most prepaid phones now offer roaming using one of the following methods:
It has been suggested that a solution to this problem is to register the users of prepaid mobile phones. Such legislation faces heavy opposition from providers and consumers of prepaid service, as many consumers who desire privacy for legitimate purposes or simply by personal preference find anonymity to be the primary selling point of prepaid phones. According to a 2005 study 9 of 24 surveyed OECD
countries require prepaid mobile users to register. These countries are Australia, France, Germany, Hungary, Japan, Norway, Slovak Republic, South Africa and Switzerland.
The freedom and privacy allowed by prepaid cell phones might help circumvent government oppression and censorship, allowing improved reporting and coordination of dissidents under oppressive regimes.
While there is no doubt that criminals and terrorists use telecommunication services, to date there has been no public study that has clearly examined the possible link of non-registration of prepaid mobile phones to greater risk of criminal or terrorist activities. However, mandatory registration may be a breach of a prepaid user privacy, and currently the question various jurisdictions have decided on or are examining is whether this privacy breach is an appropriate action versus the threat that anonymous usage of prepaid services pose.
ed prepaid services differently from the post-paid services.
The financial statements
for the company must treat prepaid services differently from their postpaid services. When a user makes a top up payment, it may not be declared immediately as revenue for the business. Instead it is treated as deferred income
and only enters the accounts as income once services are actually consumed. The sum of the unused balances from all customers effectively is treated as a liability in the balance sheet
.
Another issue is the treatment of VAT
for operators in the European Union
. Typically a prepaid top up will attract VAT in the home country at the point of sale. However, roaming calls
made between countries in the EU are treated as a trade in services between EU members and hence attract zero rate VAT
.
Sometimes the operators proposition itself has unintended side effects on the financial statement
s. For example, the top up rewards described above encourage frequent top up. However competition between operators in some cases has pushed rewards to the point where a customer can get the majority of their calls and text free by topping up a certain amount each month. This makes it harder for a user to "burn through" their balance and allow the top up revenue to actually enter the operator's books as revenue.
Mobile phone
A mobile phone is a device which can make and receive telephone calls over a radio link whilst moving around a wide geographic area. It does so by connecting to a cellular network provided by a mobile network operator...
for which credit is purchased in advance of service use. The purchased credit is used to pay for mobile phone services
GSM services
GSM services are a standard collection of applications and features available to mobile phone subscribers all over the world. The GSM standards are defined by the 3GPP collaboration and implemented in hardware and software by equipment manufacturers and mobile phone operators...
at the point the service is accessed or consumed. If there is no available credit then access to the requested service is denied by the mobile phone network
Intelligent network
The Intelligent Network , is the standard network architecture specified in the . It is intended for fixed as well as mobile telecom networks...
. Users are able to top up their credit at any time using a variety of payment mechanisms.
The alternative billing method (and what is commonly referred to as a mobile phone contract) is the post-paid mobile phone
Postpaid mobile phone
The post-paid mobile phone is a mobile phone for which service is provided by a prior arrangement with a carriage service provider . The user in this situation is billed after the fact according to their use of mobile services at the end of each month...
, where a user enters into a long-term billing arrangement with a mobile network operator
Mobile network operator
A mobile network operator , also known as mobile phone operator , carrier service provider , wireless service provider, wireless carrier, or cellular company, or mobile network carrier is a telephone company that provides services for mobile phone subscribers.One essential...
or carriage service provider (CSP).
Overview of the prepaid service
A prepaid mobile phone has access to most if not all of the services offeredGSM services
GSM services are a standard collection of applications and features available to mobile phone subscribers all over the world. The GSM standards are defined by the 3GPP collaboration and implemented in hardware and software by equipment manufacturers and mobile phone operators...
by a mobile phone operator, although the charges for these services may differ from customers with the same operator who have a postpaid contract
Postpaid mobile phone
The post-paid mobile phone is a mobile phone for which service is provided by a prior arrangement with a carriage service provider . The user in this situation is billed after the fact according to their use of mobile services at the end of each month...
.
In addition, a prepaid phone has a balance which can be queried at any time, and also topped up periodically. Examples of ways in which the balance can be topped up are the following:
- a credit cardCredit cardA credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
or debit cardDebit cardA debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution... - direct from a bank account using an ATMAutomated teller machineAn automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
- in a retail store by purchasing a "top-up" or "refill" card at retail. These cards are stamped with a unique code (often under a scratch-off panel) which must be entered into the phone in order to add the credit onto the balance.
- in a retail store using a swipe cardMagnetic stripe cardA magnetic stripe card is a type of card capable of storing data by modifying the magnetism of tiny iron-based magnetic particles on a band of magnetic material on the card...
where the balance is credited automatically to the phone after the retailer accepts payment. - from other mobile phones on certain networks which provide international top-up services, where the initiator of the top up is often an migrant workerMigrant workerThe term migrant worker has different official meanings and connotations in different parts of the world. The United Nations' definition is broad, including any people working outside of their home country...
wanting to add minutes to the prepaid mobile phone of a family member back home. - direct from some open-loop prepaid cards featuring a mobile refill service.
- through electronic reloadingElectronic reloadingIn a prepaid mobile phone, topping-up or reloading is needed to further enjoy the services offered by the operator. There are a lot of options on how to reload a prepaid mobile phone...
where a specially designed SIM card (Retailer's SIM card as used to define in the Philippines and India) is used to reload a mobile phone by entering the mobile number and choosing the amount to be loaded. This process is widely implemented in the Philippines and India so that any person can be a prepaid load retailer creating a nationwide availability of reloading stations, even in remote areas.
Credit purchased for a prepaid mobile phone may have a time limit, for example 90 days from the date the last credit was added. In these cases, customers who do not add more credit before expiration will lose their remaining balance.
There is no compulsion on a prepaid mobile phone user to top up their balance. To maintain revenues, some operators have devised reward schemes designed to encourage frequent top ups. For example, an operator may offer some free SMS
SMS
SMS is a form of text messaging communication on phones and mobile phones. The terms SMS or sms may also refer to:- Computer hardware :...
to use next month if a user tops up by a certain amount this month.
Unlike postpaid phones where subscribers have to terminate their contracts, it is not easy for an operator to know when a prepaid subscriber has left the network. To free up resources on the network for new customers, an operator will periodically delete prepaid SIM cards which have not been used for some time, at which point their service (and its associated phone number) is discontinued. The rules for when this deletion happens varies from operator to operator, but may typically occur after 6 months of non-use.
By 2003 the number of prepaid accounts grew past contract accounts, and by 2007, two thirds of all mobile phone accounts worldwide were prepaid accounts.
History
The history of the prepaid mobile phone begins in the 1990s1990s
File:1990s decade montage.png|From left, clockwise: The Hubble Space Telescope floats in space after it was taken up in 1990; American F-16s and F-15s fly over burning oil fields and the USA Lexie in Operation Desert Storm, also known as the 1991 Gulf War; The signing of the Oslo Accords on...
when larger markets were being sought after by the mobile phone operators. Before this date, all mobile phone
Mobile phone
A mobile phone is a device which can make and receive telephone calls over a radio link whilst moving around a wide geographic area. It does so by connecting to a cellular network provided by a mobile network operator...
services were offered on a post paid basis
Postpaid mobile phone
The post-paid mobile phone is a mobile phone for which service is provided by a prior arrangement with a carriage service provider . The user in this situation is billed after the fact according to their use of mobile services at the end of each month...
, which excluded people with a poor credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
.
Advantages of prepaid
A prepaid plan may have a lower cost (often for low usage patterns e.g. a telephone for emergency use) and make it easier to control spending by limiting debt. They often have fewer contractual obligations - no early termination fee, freedom to change providers, plans, able to be used by those unable to take out a contract (i.e. under 18). Depending on the local laws, they may be available to those who do not have a permanent address, phone number, or credit card. This makes them popular amongst students away from their home towns and travelers.Disadvantages of prepaid
Sometimes, pay-as-you-go customers pay more for their calls and SMS messages, and in some cases they are limited in what they can do with their phone - calls to international or premium rate numbers may be blocked, and they may not be able to roamRoaming
In wireless telecommunications, roaming is a general term referring to the extension of connectivity service in a location that is different from the home location where the service was registered. Roaming ensures that the wireless device is kept connected to the network, without losing the...
. These limitations are often due to the complexity of managing the credit system for high price calls, or when users are not on their home network.
Churn
As described above, prepaid accounts require that a subscriber have funds in the account to make outgoing calls (except emergency callEmergency Call
Emergency Call is a British film released in 1952 by Nettlefold Films. The film was directed by Lewis Gilbert and stars Jack Warner in a familiar role playing a policeman, Anthony Steel, Joy Shelton and Sid James as a dubious boxing promoter....
s which are always allowed). In the US incoming calls are also barred. In some other countries, a prepaid mobile with zero balance may still receive calls and texts.
This results in an "on/off" or "all or nothing" proposition for the prepaid service providers and their clients (that is, the account either has enough credit to use the phone, or it does not). Some operators (for example Orange) allow their pre-pay customers to have a small negative balance to allow short calls or texts when the customer’s credit has been completely used. This is then deducted when the customer next adds more credit.
The time most likely for a prepaid customer to switch to a different service provider is when the prepaid account reaches a "zero credit balance". Like other service providers, mobile service providers losing a mobile account call it "churn."
Prepaid mobile phones and roaming
In the early years, prepaid mobile phones could only be used within the operator's network who the customer purchased the phone from. It was not possible to roamRoaming
In wireless telecommunications, roaming is a general term referring to the extension of connectivity service in a location that is different from the home location where the service was registered. Roaming ensures that the wireless device is kept connected to the network, without losing the...
onto other GSM networks when using the phone abroad. This was because the operator had no way to bill calls in real time from another network.
However, most prepaid phones now offer roaming using one of the following methods:
- the prepaid mobile phone user dials a "trigger" number from the foreign location using a USSD message which is not charged for whilst roaming. Upon receipt of the USSD, the customer's operator will then return the call. When the service calls back, the user is being charged for the cost of the service from the credit available in the home network. The service will then prompt the user to enter the dialled number of the party to be called. The disadvantage of this method of roaming is that the user will not be able to dial numbers directly from the handset. The advantage is that it works in almost all locations around the world since USSD is ubiquitous and free.
- the user can direct dial from their handset if the network they are roaming in supports CAMEL (Customised Applications for Mobile networks Enhanced LogicCustomised Applications for Mobile networks Enhanced LogicCustomised Applications for Mobile networks Enhanced Logic, or CAMEL for short, is a set of standards designed to work on either a GSM core network or UMTS network. They allow an operator to define services over and above standard GSM services/UMTS services...
). This allows real time billing by the home operator without having to dial the customer back. The advantage is that it is more natural and works seamlessly. The disadvantage is that not all networks support CAMEL so the list of countries where a prepaid customer can use their phone abroad is smaller than for postpaid mobile phones.
Privacy rights and prepaid mobile phones
A concern of police and security agencies worldwide is that prepaid mobile services allow the user to be anonymous and therefore facilitate criminal, or terrorist activities. Prepaid phone users can be anonymous for two reasons:- the prepaid SIM card can be sold in a shop like any other goods. There is no need to register them at point of sale, unlike postpaid phones who have to credit check the user before allowing them to purchase and enter into a contract.
- Because prepaid services can often be topped up using cash and vouchers, there is no way to trace the payment and hence determine the identity of a prepaid phone user from payment records.
It has been suggested that a solution to this problem is to register the users of prepaid mobile phones. Such legislation faces heavy opposition from providers and consumers of prepaid service, as many consumers who desire privacy for legitimate purposes or simply by personal preference find anonymity to be the primary selling point of prepaid phones. According to a 2005 study 9 of 24 surveyed OECD
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
countries require prepaid mobile users to register. These countries are Australia, France, Germany, Hungary, Japan, Norway, Slovak Republic, South Africa and Switzerland.
The freedom and privacy allowed by prepaid cell phones might help circumvent government oppression and censorship, allowing improved reporting and coordination of dissidents under oppressive regimes.
While there is no doubt that criminals and terrorists use telecommunication services, to date there has been no public study that has clearly examined the possible link of non-registration of prepaid mobile phones to greater risk of criminal or terrorist activities. However, mandatory registration may be a breach of a prepaid user privacy, and currently the question various jurisdictions have decided on or are examining is whether this privacy breach is an appropriate action versus the threat that anonymous usage of prepaid services pose.
International prepaid mobile phone branding
In an effort to differentiate the prepaid from post-paid service for their customers, CSPs have brandBrand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
ed prepaid services differently from the post-paid services.
Financial accounting issues arising for operators
Prepaid services pose a number of challenges for the accountants at the mobile phone operator.The financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
for the company must treat prepaid services differently from their postpaid services. When a user makes a top up payment, it may not be declared immediately as revenue for the business. Instead it is treated as deferred income
Deferred income
Deferred income is, in accrual accounting, money received for goods or services which have not yet been delivered...
and only enters the accounts as income once services are actually consumed. The sum of the unused balances from all customers effectively is treated as a liability in the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
.
Another issue is the treatment of VAT
Vat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
for operators in the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
. Typically a prepaid top up will attract VAT in the home country at the point of sale. However, roaming calls
Roaming
In wireless telecommunications, roaming is a general term referring to the extension of connectivity service in a location that is different from the home location where the service was registered. Roaming ensures that the wireless device is kept connected to the network, without losing the...
made between countries in the EU are treated as a trade in services between EU members and hence attract zero rate VAT
Zero-rated supply
In economics, zero-rated supply refers to items that are taxable, but the rate of tax is nil on their input supplies. The term is applied to items that would normally be taxed under valued-added systems such as Europe's Value Added Tax or Canada's Goods and Services Tax...
.
Sometimes the operators proposition itself has unintended side effects on the financial statement
Financial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
s. For example, the top up rewards described above encourage frequent top up. However competition between operators in some cases has pushed rewards to the point where a customer can get the majority of their calls and text free by topping up a certain amount each month. This makes it harder for a user to "burn through" their balance and allow the top up revenue to actually enter the operator's books as revenue.
See also
- SmartphoneSmartphoneA smartphone is a high-end mobile phone built on a mobile computing platform, with more advanced computing ability and connectivity than a contemporary feature phone. The first smartphones were devices that mainly combined the functions of a personal digital assistant and a mobile phone or camera...
- Mobile phoneMobile phoneA mobile phone is a device which can make and receive telephone calls over a radio link whilst moving around a wide geographic area. It does so by connecting to a cellular network provided by a mobile network operator...
- Personal Handy-phone SystemPersonal Handy-phone SystemThe Personal Handy-phone System , also marketed as the Personal Access System and commercially branded as Xiaolingtong in China, is a mobile network system operating in the 1880–1930 MHz frequency band, used mainly in Japan, China, Taiwan, and some other Asian countries and...
- SIM card
- Mobile broadbandMobile BroadbandMobile broadband is the marketing term for wireless Internet access through a portable modem, mobile phone or other mobile device.-Description:...