Phone Plus Prepaid: Getting to the Point

Posted: 3/2003

Getting to the Point
Retailers Warm to PoSA, but Live Cards are
Still Hot

By Dr. Judy Reed Smith and Imke
Louis Mensah

It’s
not surprising that, with its many advantages, retailers of prepaid cards are
rapidly adopting point-of-sale activation (PoSA). However, not all sellers are
jumping on board.

PoSA enables retailers to reduce
fraud and shrinkage by not stocking "live" cards. Live cards obviously
are vulnerable to theft by shoppers and employees of the retailer, distributor
or prepaid card provider. With PoSA, cards are not worth anything until
activated, leaving only the retailer’s employees to be monitored. PoSA does this
by tracking the time of day a sale is made and, in some cases, requiring
employees to input an identification code to complete the transaction. Without
fear of theft, retailers can place cards in high-traffic areas to increase
sales. Preventing theft of cards is a key advantage of PoSA when you consider it
takes commissions from four to six additional sales to recover the cost of a
single stolen card.

When retailers stock live cards,
they also risk not selling some of them because of buyers’ preferences for
certain time/value combinations. In some cases, card issuers will take back
cards that do not sell, but this is not always the case. Therefore, retailers
might have nonrevenue-generating inventory taking up space. PoSA offers an
answer to this problem, known in the industry as shrinkage, because retailers
pay only for what they sell. They can have a virtually unlimited supply of the
best-selling cards since there is no one-to-one relationship between PINs/denominations
and physical cards on hand. (NOTE: It is possible to run out of PINs in
certain denominations if transactions are batch processed once a day, however
most PoSA systems can be programmed to add more PINs at a preset threshold.)

Aside from revenue-assurance
assistance, PoSA offers retailers statistics about product sales. While bar-code
systems in place at most stores do allow retailers to track inventory and sales,
PoSA systems typically provide more detailed tracking with respect to the
denomination and type of card sold than do traditional retail inventory tracking
systems. In addition, PoSA systems communicate information back up the supply
chain to the distributor or service provider.

In turn, providers and distributors
can take the information collected from different retail locations to pinpoint
cards that work well in certain areas. The information stored in the system —
type of service sold, at which location and the value of the product — greatly
improves revenue reporting, future marketing campaigns and sales. For example,
providers and distributors can help lower performing retail outlets sell more
cards by comparing data from higher performing stores targeting similar customer
demographics.

Providers and distributors also can
use data collected from the PoSA system to target advertising and promotional
messages to specific users. For example, if most cards purchased at a retail
location are for calling to Cuba, the provider or distributor might introduce
other prepaid products that have been successful with Cuban customers at other
distribution points. In addition, providers and distributors can analyze the
collected information to reveal customer purchasing habits as in this
hypothetical example: that customers who purchase $5 cards also are likely to
purchase $10 prepaid Internet cards.

PoSA also offers retailers the
opportunity to sell other prepaid products, such as prepaid wireless, prepaid
Internet or even prepaid dial tone, which requires more interaction between the
provider and the customer to be set up. To sell prepaid dial tone, the provider
needs to know where the customer lives and his home phone number, so consumers
frequently need to call an 800 number to place an order, but they can pay for it
at the PoSA terminal instead of paying by credit card over the phone. While the
800 call is still required, the need for a credit card is eliminated, thereby
opening up revenue streams from credit-challenged consumers.

MARKET OUTLOOK

Atlantic-ACM research now shows 64
percent of prepaid card issuers offer PoSA cards, but only 27 percent of prepaid
calling cards were activated through PoSA. In other words, most providers that
offer PoSA cards still sell more live cards.

There are several reasons for this.
For example, small independent retailers, such as bodegas, still prefer cash
sales and live cards since they tend to be more cash-based and resist
third-party tracking of their sales. Further, many locations do not have the
capabilities to install a PoSA system. At a minimum, retailers need a phone line
— preferably a second line — to enable PoSA. An even better solution is an
"always on" connection, which is not available in all locations.
Retailers also need to be tech savvy to know how to operate the PoSA terminal.
Thus, training employees to use the terminal can be problematic, especially for
retailers with high employee turnover. Lastly, some PoSA systems are pricey
(about $1,800 on the high end and $200 on the low end), which also can be a
barrier for a small retail chain, or even a larger one that would like to
implement PoSA in all of its locations. In addition, card issuers tack on fees
to PoSA usage either as a percent of sales (averaging 10.4 percent) or a
per-sale fee (averaging 10 cents).

As a result, there will be a need
for live, over-the-counter cards for newsstands, fund-raising groups and
low-budget shops, to name a few. Nevertheless, Atlantic-ACM’s latest research
shows PoSA gaining ground. Eighty-six percent of card issuers expect an increase
in PoSA usage as consumers become more aware of PoSA advantages.

For the consumer, PoSA means more
choice in cards and denominations and reduced likelihood that retailers will run
out of their preferred card. (If there is a host-to-host connection between the
retailer’s terminal and the provider, cards never run out, but if a batch system
is used, they might.) Further, it is less likely that a company intent on
defrauding consumers would go to the trouble and expense of deploying a PoSA
system when they can readily sell fake live cards to make a quick buck. And for
those consumers who want to recharge their cards, PoSA offers a way to do that
without a credit card that is typically required to refresh time over the phone.

Once customers embrace PoSA, there
will be more pressure on retailers to migrate to the technology. Atlantic-ACM
predicts nearly 95 percent of retailers will have implemented PoSA technology by
2005.

Dr. Judy Reed Smith is CEO and
Imke Louis-Mensah is an analyst for Boston-based Atlantic-ACM, a provider of
strategic research and consulting services serving the telecommunications and
information industries. Information for this article was excerpted from
Atlantic-ACM’s report, "Prepaid Calling Cards: Market Dynamics and
Forecasts 2003-2008" as well as a forthcoming vendor comparison study,
"PoSA Systems: Vendor Outlook and Buyer’s Guide 2003."

Source: Atlantic-ACM

Tips for Selecting a PoSA System

Retailers need to consider many
questions before settling on a PoSA solution. The following list contains a few.
Above all, before making a final decision, check references.

Which connection setup do you
require?

Do you need host-to-host (always
on), dial-up or batch transactions? If you use a host-to-host connection, it is
generally more expensive and more laborious to set up, but you are in contact
with the platform and can offer many products as well as recharge services. If
you use dial-up, your transactions take longer as the terminal has to dial up
and communicate with the platform every time. However, generally it is simpler
to set up and cheaper than host-to-host. Batch systems load PINs to your PoSA
once a day (sometimes more often), so you don’t have to dedicate a phone line.
However, you can not offer recharge, because you do not communicate with the
platform till the end of day. You may also run out of a certain card until the
next day when you load up more PINs but it is a cheaper solution.

What features are available with
the connection type you have?

Features you want to look for depend
on the type of connection and your customers’ needs. For example, if you are
interested in offering recharge, you will want to select a host-to-host
connection. You want to ensure that you select a terminal that delivers the
services you require as some limit functionality and selection of providers.

Is the PoSA system dedicated or
integrated?

You also want to ask if the terminal
you will use is dedicated to prepaid products or if software will be added to
include the capability in your existing credit card terminal. The benefit of
adding software to an existing terminal is that you don’t have multiple
terminals and the accompanying training and space. The disadvantage is that when
the credit card company updates its software, it may remove the prepaid calling
card transaction software, leaving you with no way of selling prepaid products
until it is fixed. The advantage of a PoSA terminal dedicated solely to prepaid
products is that it enables you to offer a wider range of product and does not
run the risk of being overwritten with the credit card company’s software.

Who developed the software?

You also should ask if the software
is developed in-house by the prepaid PoSA provider or by a third party. In-house
software has the benefit of quicker adaptation and personalization to your
specific needs. With a third-party solution, you may finds yourself having to
adapt to the product rather than the product adapting to your needs.

What support is available?

Does the PoSA vendor offer training,
how quickly do they repair the terminal and how is customer service delivered?