A prepaid mobile phone (also commonly referred to as pay-as-you-go, pay-as-you-talk, "pay and go", or prepaid wireless) 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).
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A prepaid mobile phone has access to most if not all of the services offered 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.
The history of the prepaid mobile phone begins in the 1990s 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.
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.
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 roam. 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.
As described above, prepaid accounts require that a subscriber have funds in the account to make outgoing calls (except emergency calls 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."
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 roam 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:
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:
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[6] 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.
In an effort to differentiate the prepaid from post-paid service for their customers, CSPs have branded prepaid services differently from the post-paid services.
Prepaid services pose a number of challenges for the accountants at the mobile phone operator.
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 statements. 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.