Subscriptions: the new norm and what it means for telcos

Subscriptions: the new norm and what it means for telcos

One of the key challenges for mobile operators in emerging markets is converting prepaid SIM card users into postpaid customers. From the telco perspective, postpaid users are more valuable for several reasons:

  • Service distribution costs (e.g. offline recharges of SIM cards) are lower, which increases the telco’s margin on services sold
  • Less likely to churn to a competitor due to the contractual relationship, in contrast with simply throwing a prepaid SIM away and buying a new one
  • ARPU and LTV increases as users are charged on a recurring basis, they are not capped on spending by their balance and services paid for in fixed price packages may partially go unused

Moving to a recurring revenue model is not unique to the telco industry: Gartner estimates that 80% of software vendors will be using a subscription-based business model by 2020. Many leading digital merchants already use the model, including Microsoft, Adobe as well as virtually all music and video streaming services.

The subscription-based business model is also strongly driven by consumers who prefer the option of consuming content limitlessly rather than one-off access through one-time payments. A noteworthy example here would be Apple shifting its iTunes download-based monetization logic to Apple Music. For any telco doing bundle deals, it should be evident that most digital content merchants now prefer the subscription model.

Yet while both telcos and digital merchants are making the move to subscriptions, the business model has been problematic for telcos in the past. The most notable example of this has been the cramming investigation in the US, resulting in a hefty fine for the telcos.

Due to potential issues with unsatisfied consumers and legislators, telcos are taking extra steps to make sure no potentially problematic services are launched with subscription payments. Depending on the telco, these can include manual service and checkout flow reviews, adding additional consent pages into the checkout flow and thresholds for customer complaint metrics.

While these steps make sense from the telco perspective, they are exceptional in the payments industry as card-based payments do not differentiate merchants or services based on the payment type.

This creates a contradictory situation: while a growing amount of merchants want to use recurring payments, on-boarding these merchants from the telco side is not scalable due to the arduous review process. What’s the alternative?

As with carrier billing in general, scale and compliance can be ensured through several steps:

  1. Providing merchants with turn-key payment solutions that already account for local compliance requirements
  2. Creating general guidelines regarding merchants that are accepted onto the DCB platform, and delegating the review process to partner companies
  3. Basing internal KPIs (such as deactivation, customer complaint and refund rates) on payment industry, rather than telco industry standards
  4. Creating a refund process that ensures customer satisfaction while also combating friendly fraud, one of the biggest fraud-related challenges in the payments industry

At Fortumo, we are glad to say we are already helping many of our telco partners adapt this scalable approach, so that they can focus on their core business rather than manual review and monitoring processes.

With telcos making the push to a recurring revenue model for their own services, a growing amount of merchants will continue to do the same in the future. Those telcos that are able to on-board such merchants quickly and efficiently will gain additional revenue, while those who lag behind will find merchants picking other payment methods over carrier billing for their income streams.