A prepaid mobile phone (also commonly referred to as pay-as-you-go or prepaid wireless or Go-Phone ) is a mobile phone for which service is purchased in advance of use. By purchasing credit to use on a mobile phone network, a user can access a mobile phone network without ongoing billing. Users can then use the mobile phone network until they run out of credit. 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).
Overview
A customer can add more credit to the pre-paid account at any time. This can either be a credit/debit card transaction with the provider (performed on the phone itself or via a third party such as a shop or ATM) or by purchasing a "top-up" or "refill" card at retail. The cards are stamped with a unique code (often under a scratch-off panel) which can be redeemed on the phone for credit. Credit 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, and their service (and its associated phone number) may be discontinued.
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.
History
First US Patent on prepaid mobile phone
A provider of prepaid mobile phone was Banana Cellular, founded by Andrew Wise in 1993, which covered the provisioning of prepaid wireless services. Banana first sold prepaid mobile phone services in April 1993 in a small office located in Phoenix, Arizona. Customers were able to connect any other mobile phone on the prepaid network. Patent Number 5826185 filed November 16 , 1994 .
Hairpin Solution
The main issue that kept early prepaid models from becoming a primary product for a CSP was that the underlying products were "hairpin solutions" meaning that it took two extra dedicated trunks on the cellular switch to make one call, one for the inbound connection to the telephony platform and the second back to the switch to complete the call. Trunks were an expensive resource in a large metropolitan Mobile Telephone Exchange and switching equipment did not have the capacity that it has today, so prepaid was relegated to being the second choice for most US carriers.
SS7 Signalling
Current prepaid mobile phone solutions rely on out-of-band signalling (typically SS7) to set up the call. This happened after international standards for handling prepaid call types were developed.
First US prepaid mobile phone installation
Among the first, if not the first large metropolitan area implementation of prepaid mobile phone service in the United States was in the early 1990s at Houston Cellular Telephone Company, Houston, TX. HCTC was then an independent wireless carrier owned jointly by PacBell and BellSouth. HCTC introduced a service offering branded "calltrac" based on Voice Systems Technology, Inc.'s telephony platform with RPAC-2 billing during the first quarter of 1994.
HCTC initially offered prepaid mobile phone as a non-advertised alternative way to provide service to the more than 40% of cash-carrying, walk-in consumers who were being denied cellular service each day due to lack of credit. The plan was very expensive for the day, most subscription plans were double that of their postpaid subscribers and the prepaid subscriber still had to pay for their equipment (handsets) and anticipated call usage up front. HCTC used the Calltrack prepaid cellular program as a credit development vehicle until they developed subscriber reports intended to show that "Calltrack" was not a profitable venture.
The reports showed that a Calltrack prepaid subscriber was actually more profitable than their traditional postpaid subscribers by a huge margin. This was because, at that time it cost an average of 17% of their gross proceeds to collect on their bad debt postpaid subscribers, plus HCTC paid for all the postpaid handsets. HCTC was poised to become the first U.S carrier to go primarily prepaid, but it did not happen. Voice Systems Technology Inc. was sold to Boston Communications Group (BCGI) and the subsequent sale of prepaid cellular platforms in the US was immediately curtailed and the prepaid cellular service bureau was born. U.S Carriers spent several years trying to catch-up and develop their own solutions but patent litigation has kept prepaid from becoming the dominant form of payment.
The Contributors
The possibility of "prepaid wireless" in the United States actually came from Judge Green's decision to break up AT&T's monopoly. Prior the 1968 Carterfone decision, it was not permitted to connect non-Bell (Bell Labs or Western Electric) ancillary devices to the telecommunications network.
The first practical implementation of prepaid wireless originated in the United States from a small group of entrepreneurs at Voice Systems Technology, Inc. The first European PAYG deployment was in Portugal in 1995 when Portuguese operator TMN deployed a PAYG solution called MIMO .
Eircell
The concept was also developed by Eircell (then owned by incumbent Telecom Éireann) in the Republic of Ireland in 1997, as a method of letting different types of people (those under the age of 18, those without bank accounts and those without proof of identity) obtain a mobile phone. Originally limited to one TACS handset, costing £99 upfront, the system was an amazing success, despite the high price of calls and a 7p service charge on every operation. The system was branded as Ready To Go , a name still used by Vodafone, who now own Eircell.
A user would buy a phone, usually pre-loaded with some amount of credit, and would purchase extra credit when required. A call cannot be made unless the user has the amount required for that call's minimum charge.
The concept has since been copied in many other countries, with virtually every network in every European country supporting it. On many networks, such as Ireland's Meteor, pay-as-you-go is the main mode of operation, with pay monthly account phones being very much second-class. Conversely, in the United States, account phones offer the best features with pay as you go services being far more restricted in functionality. In developing countries pre-pay tariffs are chosen by the overwhelming majority of subscribers - in South Africa, for example, over 90% of users are on a pre-pay tariff.
Prepaid versus post-paid mobile services
Advantages of prepaid
May be lower cost for low usage - e.g. telephone for emergency use. ($30/year or less) Limited indebtedness - easier to control spending. 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) etc. May be available to those who do not have an address, phone number, credit card, etc. The reason being the prepaid services are so popular amongst students and people working away from their hometowns.
Disadvantages of prepaid
Often, pay-as-you-go customers pay more for their calls and SMS messages, and 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.
In the United Kingdom, operators have started raising the price of pay-as-you-go phones in an effort to attract users to contract plans (which tend to earn more money than prepay overall). This has resulted in an "ON/OFF" or "All or nothing" proposition for the prepaid service providers and their clients (i.e. the account has enough credit to use the phone, or it does not). Although Orange allow their pre-pay customers to use a further £2.50 of calls or texts when the customers credit has been completely used. This is then deducted when the customer next adds more credit.
United States: Solution to the "All or Nothing" problem
As described above, "prepaid" accounts require that a subscriber have funds in the account to use the phone. In the United States this is true for making outgoing calls and receiving incoming calls. 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". Mobile service providers losing a mobile account call it "Churn".
A method developed (U.S. Patent 7,257,388) to make the prepaid subscriber account more "sticky" and reduce the risk of subscribers falling into the "churn chasm", is to provide limited functionality after a prepaid account reaches a zero balance. This is achieved by routing calls made to the prepaid subscriber to a temporary voicemail, that the subscriber can access on a true pay as you go basis (i.e. the subscriber only pays to access the messages). The subscriber may then access the temporary voicemail by way of a toll call, or a single use prepaid calling card. The subscriber does not have the minimum amount necessary to top up the mobil
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