Cha-Ching!

Posted: 03/2000

Cha-Ching!
PoS Activation Cuts Risk, Expands Marketing Options for
Prepaid Communications Vendors
Prepaid calling card vendors say the prepaid calling card market in general and PoSA
systems in particular are booming.
By James R. Dukart

When teleconsumers want to initiate service, they may want to grab a head of lettuce
and a carton of milk on the way out. Or if they’re feeling a bit politicallyincorrect,
perhaps score a six-pack of beer and a pack of cigarettes.

They might want to do that, that is, if their local, long-distance or wireless phone
company is located in their local supermarket, department, grocery or convenience stores.

Sound far-fetched? Not really. It’s happening today for millions of people who buy
prepaid phone services at thousands of locations throughout the country. For many, there’s
a good chance that the phone services purchased are activated immediately–at the cash
register or checkout line–through point-of-sale activation (PoSA).

PoSA systems include a number of ways to sell and activate prepaid communications
services. Though no single established protocol for PoSA exists, merchants generally
activate cards or phones by magnetic stripe or credit and debit card readers, retail
bar-code scanners or through their cash registers by generating a personal identification
number (PIN) that allows phone service via a prepaid card.

In a recent report, Boston-based telecom consultancy ATLANTIC-ACM (www.atlantic-acm.com) found nearly one-third of all
prepaid calling cards sold in 1999 were activated at the PoS. In the same study, the group
found that nearly one-half (46 percent) of all prepaid calling card providers offered some
type of PoSA.

Imke Mensah, an analyst at ATLANTIC-ACM and the report’s author, says PoSA systems are
growing in popularity at a faster rate than recent statistics show.

"I expect next year that the number should jump quite a bit from 46 percent,"
says Mensah. "We are seeing a lot of interest particularly on the part of the
facilities-based carriers, who can afford to install and maintain PoSA systems."

Mensah says smaller resellers may not offer extensive PoSA systems, but that if they
don’t, they increasingly will lose business to the largest retail outlets and chain
stores, which are all clamoring for PoSA.

She says ATLANTIC-ACM also predicts overall prepaid calling card revenues to grow by a
12.2 percent compound annual growth rate between now and the year 2004, from nearly $3
billion in 1999.

Boston-based The Yankee Group (www.yankeegroup.com)
predicts overall prepaid phone services could be a $24 billion market by 2002.

In short, prepaid calling card vendors say the prepaid calling card market in general
and PoSA systems in particular are booming.

"The market is extremely hot," says Jack Steinmetz, vice president of sales
for Tele-Pak Inc., (www.tele-pak.com) and
distributor of phone cards. "The large companies all want to go to PoSA, and all the
chain stores want cards that are not active until they are actually sold. I would say PoSA
cards are triple what they were in 1998 and soon enough I expect everything to be
PoSA."

"Fantasy Products"

Steinmetz, and others, list common-sense reasons retailers prefer PoSA systems to
pre-activated calling cards.

"PoSA cards have no theft, excellent recording, no inventory control and no
prepayment by merchants of any kind," says Paul Hickey, CEO of Orem, Utah-based
prepaid services provider Q Comm International Inc. (www.qcomm.com).
"These are really like a fantasy product to these retailers. They are among the
highest value and highest margin products in the store, while at the same time the most
free of inventory or theft concerns."

Linda Walters, CEO of Camden, S.C.-based prepaid provider National Bankcard Services
Inc. (NBSi, www.nbsiphonecard.com), adds the
average convenience store has between $500 and $1,000 tied up in phone card inventory at
any point in time. In a 150-store chain that equates to more than $100,000 in inventory,
which does not exist under a PoSA system, she adds.

Using NBSi’s POSA 2000 system, merchants can print, activate and sell up to 99
different prepaid products, without carrying one dollar of prepaid inventory, Walters
says.

"We’ve taken the credit card terminal and taught it to do different things,"
she says. "We cut out the fraud, the bounced checks and the forged checks. Now when
you come into the store, you tell the clerk what you want, the clerk punches in her codes,
prints the card and bingo, you are on your way with phone service."

Phil Graves is director of product development for U.S. South Communications Inc. (www.us-south.net), which recently introduced its Fast
Card PoSA program. Graves calls PoSA "hugely interesting to the retail market"
because of its inventory and theft control problems. He adds another benefit is that
stores holding nonactivated cards can put them in front of customers, enticing them with a
purchase of a product they can see, touch and examine.

"Turning on the card is about a tenth of the battle," Graves continues. He
says additional advantages to PoSA systems include authorization security and extensive
post-sale data collection and reporting.

"The cards are assigned to one specific merchant, and each terminal has a password
assigned to it, so we can tell the merchant which terminal turned on which card at what
time and what date," Graves says. "This is all available real time via the
Internet, so retailers and distributors can keep track of their sales as they
happen."

Says Stephen Flaherty, president of Q Comm International, advanced reporting features
are of particular interest to wholesale distributors, who can use roll-up reporting to see
what stores within their chains are selling the most of what type of card.

That data can be used to track current sales and to launch new promotions aimed at
increasing future sales, Flaherty says.

"We have the same objective as they [retailers] do, to drive more foot traffic
into the store," Flaherty adds. "Each card can have a special promotion on it,
‘return this card for a free 20-ounce Coke’ or something like that."

Q Comm’s Hickey calls prepaid cards "pocket-sized billboards" and notes his
company has made custom cards for companies such as Holiday Inn or the American Automobile
Assoc-iation, which use one side to tout their services.

Another advantage to having sales data is that retailers can create calling plans based
on current usage patterns, Flaherty says.

Graph: Percentage of Prepaid Calling Cards Activated at Point of Sale
in 1999

"If someone says ‘Hey, I am selling $15,000 per month to people who are calling
Poland,’ I might want to have a Polish-only card and offer special rates and do a special
promotion," Flaherty says. "We have the ability to literally craft new calling
plans within days."

Vendors say PoSA systems are flexible enough to change promotions after a card has been
sold. For example, Graves says his system can be programmed to provide a customized–and
changeable–greeting each time a caller uses the phone card.

"They can say ‘Hi, thanks for using your Texaco card,’ or change it a month later
to say the company is running a special on a certain product or service," Graves
says.

NBSi’s Walters adds the POSA 2000 system will do promotional cards on the fly.

"For every six-pack of Miller beer purchased, it can spit out a five-minute phone
card," Walters says.

Prepaid activation systems and phone cards already are turning up everywhere, from
amusement parks to shopping centers, hotels, restaurants, casinos, rental car agencies,
airports and any other place that hosts a large amount of visitor foot traffic, she adds.

Mainstream America Prepays

The success of prepaid PoSA hinges on the success of prepaid services in general, and
PoSA vendors and observers see green fields ahead in the overall prepaid market.

"Forty percent of the people in this country do not have their own phone,"
Walters says, citing military personnel, college students, people who have recently moved,
travelers and migrant workers among the hottest domestic markets.

She says foreign countries and regions, including Asia, Australia, Mexico, South
America and the United Kingdom are showing "tremendous interest."

"Prepaid used to be the unphoned and the unbanked," says Graves, referring to
the prepaid industry’s stigma as a refuge for those deemed less than credit-worthy by
local phone companies. "Now it’s a way for parents to enable college students to call
home within limits, or a way to cap expenses on a cellular phone."

Graves says another hot market is prepaid cards for corporate uses.

"We see a lot of companies using prepaid for convention work," he says.
"They avoid having employees use expensive hotel switchboards and they know ahead of
time what their phone costs will be."

Q Comm’s Hickey and Flaherty agree.

"We see it every day. Mainstream America is becoming much more active in pursuit
of prepaid. It is no longer just the financially disenfranchised," Flaherty says.

Hickey adds, "People are becoming more aware of connect fees and monthly
maintenance fees, and they are saying every card has its use. I furnish my sales guys
calling cards, because it is so much more effective than using an AT&T card or having
to buy one at the airport that charges me 50 cents per minute."

Another reason vendors are high on prepaid PoSA’s future is that PoSA systems can be
used for more than prepaying phone service.

Walters says her company’s terminals are used for gift certificate cards, to prepay
regular phone or utility services and pay credit card balances, among other things.

"The oil companies should love this," Walters says. "They can sell you a
prepaid gas card for $100 worth of gas and it will cost you $98. You save a few dollars
and they get your money in advance."

The future looks even brighter for another type of prepaid telephone service, she says.

"The next hot thing that will overshadow all of this is prepaid cellular,"
Walters says. She predicts wireless customers will find that prepaying for service beats
paying a regular monthly fee for banked minutes.

"There’s a growing trend to prepay car washes, sodas, gasoline and a lot of other
things through a terminal like ours," says Hickey. "You can funnel multiple
products from a variety of carriers through our system."

James R. Dukart is a freelance writer based in Minneapolis. He can be reached at [email protected].