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Sell more smartphones to more customers with device financing

Lady using smartphone in street

How device financing can help MNOs, MSP’s and retailers sell bigger, better, shinier devices to more customers, without increasing risk.

Derick Cassidy, Trustonic’s Telecoms Platform Product Director discusses some of the challenges facing the mobile device industry and how device financing can help MNOs and retailers improve smartphone affordability for their customers, grow revenues and expand their customer base, without increasing commercial risk.

  1. What is device financing
  2. Does device financing increase commercial risk? 
  3. What factors need to be considered with device financing? 
  4. Within a mobile operator, who needs to be involved in the decision making?
  5. Device financing considerations for MSPs and retailers
  6. OEM-specific device financing considerations
  7. Security considerations
  8. Dynamic and evolving security controls
  9. What’s the solution?

What is device financing and what does it enable? 

Device financing is simply the ability to purchase a device on a monthly payment plan.

It is rapidly becoming a growing trend in the mobile device market and there are several reasons for this, but primarily, cost and affordability and growing global trend of financing larger purchases.

The cost of smartphones has risen significantly in recent years. In more mature markets, customers want better smartphones with bigger screens, memory, newer cameras, and now access to 5G delivering access to richer media and services. High-end devices loaded with the latest features tend to come with a hefty price tag which limits the number of people who can afford them, outright.

What does device financing mean for emerging markets?

In emerging markets, there are examples where mobile operators and regulators are eager to migrate customers on mass from 2G to 4G to reduce costs and investment in modern networks. However, encouraging customers to migrate from their feature phones to smartphones can be cost-prohibitive for many consumers. In addition, they are looking for ways to increase the specification of the devices offered to their customers, providing a richer customer experience.

In Sub-Saharan Africa, the cost of mobile devices can be around 30% of the average monthly wage. More shockingly, the median cost of an entry-level smart device still represents 120% of monthly income for the poorest – representing 20% of the population.

How does device financing actually work?

Offering device financing, in the form of a monthly payment plan, allows customers to spread the cost rather than having to make a large initial outlay. Device financing enables more customers to purchase devices they may otherwise be unable to afford. This may mean some customers can afford a smartphone for the first time, also giving them access to a wide range of digital services that they were previously unable to take advantage of. It may also allow some customers to access a mid-to-high range device, improving their customers’ experience and access to digital services and increased smartphone capability in turn leading to higher usage of data services

Device financing provides a solution by providing credit or finance to customers, along with mechanisms and controls for mobile operators, financial institutions, and retailers to manage the associated commercial risk.

Does device financing increase commercial risk? 

We know that the concern for mobile operators and retailers is that, by providing more device financing to more customers, they will increase their commercial risk when customers default on payments or abuse the terms of a plan. And, given that 10% – 15% of customers do not pay their bills, these costs can be significant. According to the Risk & Assurance Group’s Revenue Assurance and Fraud Management survey, $14.2 billion is lost to communications providers and their customers.

In the more mature markets, this is less of a problem due to well-established finance practices such as credit-scoring and reporting, all designed to minimise the risk. However, these strict criteria can make it challenging for mobile operators to attract and grow their customer base, and rejection rates for higher-end financed devices remain high, with some operators reporting a 70% rejection rate during device-led promotions.

In markets where established credit practices do not exist, there is a greater need for an effective, low-risk solution that balances customer affordability with commercial appetite. When credit is available, it is often expensive or has punitive fees. Some countries have a predominantly cash-based culture, in which 40% to 50% of the population have no bank account meaning there is very little credit information about customers, which presents problems for operators in these markets. To offset the 30% to 40% loss they expect to make, operators may inflate the cost of devices which has an adverse effect on attracting customers.

What factors need to be considered with device financing? 

Mobile network operators (MNOs) need to consider several factors when offering device financing to grow revenues.

Device type

They need to determine the types of devices to offer; for example, a high-end or mid-range device. Furthermore, they need to understand what type of handset brand their customers want and require financing for. Whilst also considering what types of controls and security come as standard on these devices.

Tools and controls

Similarly, they need to know what additional controls and mechanisms can be used on these devices to prevent customers defaulting on payments.

Backend integration 

Integration with the backend billing system also needs to be considered as different devices and OEMs have different methods of messaging and communicating. Many backend systems, particularly those in emerging markets, still rely on manual processes, while those in established markets where labour costs are higher are far more automated and sometimes cloud based.

Time to market 

The time involved in bringing a device to market on a finance basis also needs to be considered. For some operators, particularly those with over-the-air (OTA) activation and zero touch capabilities, this can be rapid.

However, for those wanting to customize devices, it can take a little longer.

Within a mobile operator, who needs to be involved in the decision making?

Different parts of an organization will have different views and inputs into where the problems lie. The fraud team will be concerned about devices acquired from a retail channel or an e-commerce channel appearing on the network for three months and then disappearing. Whilst the finance and accounts team will want to reduce the bad debt associated with non-payment of devices. The handset team will want to understand the controls that can be placed on devices and the marketing team will want to offer customers the best devices at the lowest prices.

Balancing these different requirements is generally a decision for the C-level – Sales, Marketing, and Finance team who have the overarching view about the true cost of offering device financing and the associated risks. Again, this will vary for each market because of the different types of financial and regulatory practices.

What are the device financing considerations for retailers

Retailers want to be able to offer the best devices, protected by the best technology, on the most secure OEMs. This enables them to offer a repeatable, scalable, low-touch, low-friction implementation designed to get more and high spec devices into customers’ hands. How? They must ensure that the finance and technology partners are able to communicate and integrate with one another.

Customization and branding are also key. Both the finance and device control products must be easy to consume. Each market has its own requirements, retailers want to reflect this with their own branding, messaging and localisation. Furthermore, they want to be able to achieve this with minimal effort, without needing Android developers to build new APKs and applications.

What are the OEM-specific device financing considerations 

With OEMs eager to sell more 5G and high-end devices, they can put device financing controls in place to mitigate against non-payment and fraud. Ensuring their devices can be controlled, locked down and secured is critical to OEMs seeking to increase their revenue, regardless of the channel they’re selling through.

For devices sold through operators and resellers, OEMs must ensure that any built-in controls are compatible with the mobile operators, and that they offer the features the resellers require to finance and control these devices. Of course, in some cases, OEMs are bringing their devices to market directly in their own OEM-branded stores, making the OEM the retailer, financer and handset provider.

Any additional work that OEMs need to perform to integrate these controls, can be minimised by implementing the latest Android 11 software and policy-compliant device-financing controls.

What are the key security considerations for device financing?

As well as managing the risks associated with device financing such as non-payment, there is also the need to protect devices from attack. This means ensuring that device financing controls cannot be tampered with, either physically (for example, by interfering with device hardware) or technically (for example, by performing a brute force attack).

There are different ways to approach the problem: you can implement a technical solution such as Trustonic’s platform, or you can accept the risk and adjust your pricing to compensate. However, as we’ve seen in some countries, inflating prices is detrimental to all customers. You also have to consider whether the attacks perpetrated on devices are scalable or not; if they’re not, few devices will be lost, but if an attack can be done at scale, this can lead to significant losses.

When implementing a technical solution, you also have to be mindful of the different levels of security on devices from various OEMs, so you choose a solution that will work consistently with existing security features. These features include core Android functionality and augmented OEM features. For example, in heavily-regulated markets, devices may employ the latest cryptography, while in other markets this won’t be the case. Any device financing controls you put in place must be able to cope with either scenario.

What are the regulatory dynamics around device financing solutions?

Mobile device payment controls used to be fairly rudimentary and generally involved turning off a customer’s SIM card. However, in some markets, SIM locking is now banned by the regulators and connectivity has evolved to the extent that a customer may be relatively unaffected by SIM locking, if they still have Wi-Fi access.   This happened in the UK last year with OfCom’s announcement in October.

Therefore, what’s needed is a far more sophisticated and dynamic solution, that can be tailored to specific markets where different conditions and regulations exist. For example, with a dynamic set of controls, SIM locking can be employed in regions that permit it, or turned off in regions that do not.

Similarly, markets differ in terms of the legal definition of ownership and this must be considered too. In some regions, after a customer makes their first payment, the device is deemed to be theirs while in other regions the customer is not deemed to own the device until all the debt is paid off. Understanding who owns the asset and the debt payment is critical because this affects licensing, end-user agreements, and explicit and informed consent. Therefore, you need a dynamic solution that can adapt to a particular region.

What’s the solution?

So, given these challenges discussed, the solution to these problems is simple: provide full control over a device, throughout its lifecycle, which can be tailored to the specific country and region in which it is used, fully customisable to the mobile operator, retailer or financial institutions processes.

Trustonic’s Telecoms Platform enables operators, OEMs and retailers to increase revenue by enabling them to offer more affordable smartphone devices to more customers, by, lowering the credit rejection rate, without increasing their commercial risk. Plus reduce profit erosion, secure the supply chain and stem losses resulting from theft and fraud whilst reducing the cost of customer care and benefit from higher volume of net connections.