21 JAN 2019

Carrier billing fees: why less has become more

POSTED UNDER Direct Carrier Billing Payments
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Martin Koppel

CEO & Co-Founder, Fortumo

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  • Carrier billing has shifted from VAS to complex digital offerings

  • Merchants expect payouts similar to card-based payments

  • Automation of DCB processes keeps costs down and makes payouts competitive

  • For telcos, lower margins are compensated by new segments and bigger volumes

Over the past decade, mobile entertainment has changed drastically. Instead of feature phones and simple consumer VAS services, we now have smartphones and complex digital entertainment offerings.

For carrier billing companies, this has meant a change in customer segments and product requirements. Not all companies have been able to keep up and focused on their legacy business. Since that business is declining, some have been forced to close shop while others have been acquired by the competition.

For telcos, VAS has been an excellent business with great margins but always overshadowed in volumes by device sales, calls, data and messaging services. Today the legacy VAS business is in decline because entertainment has shifted elsewhere. VAS is also a frequent cause of customer complaints and overhead: in extreme cases, leading to hefty fines (US & Australia).

On feature phones, telcos had the monopoly of distribution and monetization channels and dictated the commercials terms. Modern digital merchants have many other ways to reach their audience and collect payments from them. This means the terms have changed.

As the old VAS business is slowly fading out, telcos need to make a choice. Either stick with the old commercials or change the strategy to focus on getting new and growing segments on board. But if the focus is on growing new business, what needs to change?

The first thing any merchant looks at when assessing new payments solutions are the fees. With VAS services, telcos were able to keep a significant portion of the payment for themselves. This was justified as they had some of the few effective channels available for mobile marketing, but also due the additional overhead such services created. If we exaggerate a bit, the approach was to start with 0% payouts to merchants and raise it just enough so that merchants would accept it.

With the modern digital business, this approach needs to be turned on its head. Companies like PayPal only take 2.9% + $0.3 of each transaction and even less than that for major merchants with big volumes. In order to compete with the likes of PayPal, the question telcos need to ask is: “What’s the absolute minimum we can charge while keeping the business profitable?”

It seems like a drastic change, but this is because carrier billing has historically been a rare exception in terms of payout levels. If we look at the payments industry as a whole, the approach everywhere else is to offer low margins, compensated by significant payment volumes.

VAS services were unable to bring carriers these significant volumes, but the merchants of today are different: app stores, streaming, productivity tools, digital publishing, parking, insurance etc.

Such merchants have substantial, low-risk payment volume. Their primary source of revenue is credit card payments and the commercial offering of many telcos comes as a cold shower to them. So how bring about a commercial offering that would be acceptable?

If telcos reduce their own margin on payments, something else needs to compensate it to keep the business viable. Bigger volumes are one factor that helps achieve this. But bigger volumes also cause overhead and manual work. This means the other critical aspect is to increase automation and reduce the costs for operating the DCB platform. Some ideas to consider for this are:

  • Providing accessible online recharge channels for prepaid subscribers and motivating their usage through offline topup surcharges

  • Automating the process of subscriber invoicing and debt collection

  • Automating the merchant approvals and user acceptance testing processes

  • Automating consumer support and refunds

Telcos have successfully automated many different aspects of their business. Several Nordic markets have made the shift from call centers to self-service helpdesks. The subscribers are able to troubleshoot their issues as before, but the overhead is substantially smaller. A similar approach can be applied to carrier billing to keep the business running.

Automation helps keep costs down and allows telcos to offer merchants competitive payouts comparable to other payment methods. This means opening up of new, high-volume and growing business segments.

Put yourself in the merchant’s shoes: if carrier billing was just one of many payment methods available to you, would you yourself accept the offer that you’re giving out today?

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