Controlling Bad Debt

Nextel (www.nextel.com) spent about $26 million in early 1999 to improve its credit policies and debt-monitoring and collection processes. In its 2000 annual report, the company said the new policies and processes helped cut domestic bad-debt expenses from $23 million in the first half of 1999 to about $10 million in the second half of that year. Then, in 2000, a 37% increase in bad-debt expenses boosted Nextel's annual total to $44 million.

Nextel is not alone.

AT&T Wireless (www.attws.com) reported making adjustments to its credit policies during 2000 that increased its number of credit-challenged subscribers and made the company more vulnerable to carrier-initiated churn.

Approximately 30% of Sprint PCS' net additions for 3Q00 (www.sprintpcs.com) were automatic-spending-limit customers, according to a recent First Union Securities analysis. Subscribers with spending limits present added bad-debt and carrier-initiated-churn risk.

Sprint PCS, AT&T Wireless and Nextel are not islands but representative states on the changing wireless landscape. As competition increases, so does pressure to add more subscribers, including non-traditional ones. You're also pressed to make subscribing to your service quicker, easier and more desirable for customers.

The challenge is to do all of these things and still attract and retain high-quality customers, those who offer high ARPUs and low risk for churn and bad debt.

“Carriers have traditionally gone for breadth rather than depth in terms of quality customers,” said Andrew Cole, Adventis (www.adventis.com) global head of wireless strategy. “They are now searching for value-added customers rather than just (high) numbers of customers. They're looking to refine and sift out what we call the dregs market, low-ARPU customers and customers that are vulnerable to bad debt.”

Best of Both Worlds

Some carriers are promoting the use of contracts to reduce churn and bad debt. Knox Bricken, a Yankee Group (www.yankeegroup.com) analyst, predicts that the use of contracts will increase. But she admitted that customers don't like contracts.

“We see a lot of contradictory stuff,” Bricken said. “We see a lot more talk about prepaid for the youth market and the credit-challenged because carriers don't want to be responsible for their debt. Then again, there is recognition that customers on contracts are higher value and bringing in a larger percentage of the revenue.”

Bricken said European carriers with predominantly prepaid subscriber bases are beginning to encourage subscribers to sign contracts.

“They want to be able to bill them for data services going forward and upsell them to other services,” she said.

Likewise, VoiceStream, after acquiring prepaid-focused Aerial and Omnipoint, tried to shift the prepaid customers to contracts, Bricken said (www.voicestream.com).

“We're seeing a lot of talk about prepaid but a lot of action focused on higher-value customers and contracts,” Bricken said.

The best thing about prepaid is that you get your money up-front. Unfortunately, you probably won't get a lot of information about prepaid customers, which means you won't know how to market additional products and services to them. Plus, prepaid customers probably won't be as loyal as postpaid customers.

On the other hand, you can gather plenty of information about contract customers, and these customers typically churn less.

Industry consulting group Adventis is helping its carrier-customers to design programs that extract the benefits of both the prepaid and postpaid worlds. Cole said the question to ask is: How can I obtain valuable customer information, regularly communicate with customers and allow them to prepay for services so that they feel some sense of control over their spending?

One way of getting the best of both worlds is by encouraging customers to set up monthly spending accounts and using real-time billing systems to monitor spending on the accounts.

Sorting Out the Chaff

Another way to reduce the risk of bad debt is to prescreen applicants. There are many ways to do this. One is to identify fraudulent applications.

Many companies run credit databases containing stolen social-security and credit-card numbers. Applicants' personal information can be checked against these databases.

Lightbridge (www.lightbridge.com) offers a service that checks an applicant's personal information to ensure that it applies to a real person and that it can be matched to the applicant. One of the company's partners, RiskWise (www.riskwise.com), runs 30 to 40 databases that applications can be checked against.

Before checking applicants' credit statuses, Lightbridge runs applications through the databases, said Julia Howell, Lightbridge senior manager of business advisory services. Disqualifying applications early eliminates more costly credit-bureau fees.

In a similar attempt to combat identity fraud, HNC Software has built a general credit-card fraud consortium, a repository of stolen credit-card data (www.hnc.com). The company plans to analyze the information and use its findings to build predictive software that will detect signs of possible credit-card fraud. HNC also is working with carriers to build a similar consortium for the telecommunications industry.

Both HNC and Lightbridge also work with credit bureaus to identify applicants who are credit risks. HNC lets carriers submit applications through a Web site or through a voice-response unit.

“We accept the application. Then our system goes out to any of the three main credit bureaus and pulls back the credit-report information and any other credit scores and delivers that back to the carrier,” said Roger Ahern, HNC vice president of product and strategic marketing, telecommunications solutions.

Lightbridge operates an inter-carrier database of write-offs and shut-offs, to which all of its carrier clients contribute. Applicants' information can be checked against the database to find out whether they have had credit problems. The database also includes the number of write-offs. You also can build a corporate database of customers that have been written-off or de-activated within your organization.

But there might be a downside to these prescreening processes.

“The business processes supported by these solutions have the potential to reduce risks, but they often meet institutional resistance,” said Don Dressler, DMR Consulting director of Bottom Line 360 revenue-management practice (www.dmr.com).

He said some sales reps think prescreening slows down the sales process. There's also more work for the salesperson at the point of sale, more paper and more interaction with the customer, Dressler said.

After the applicant becomes a subscriber, the information gathering should continue. Some vendors sell software that helps you identify behaviors that may result in bad debt and monitors for them.

For instance, HNC's ProfitMax software monitors customer behavior and uses predetermined criteria to predict whether customers may be fraud risks. The software uses artificial intelligence to identify patterns associated with fraudulent activities.

Adventis' Cole suggests that carriers collaborate to build predictive models to identify customers at risk for bad debt and then share the information. He also advocates integrating billing and customer-relationship management systems with data mining and profiling software and interfaces to credit bureaus and other sources of credit information.

“We're seeing fairly decent-sized investments required,” Cole said, adding that the integration doesn't usually cost hundreds of millions of dollars. “But it's certainly tens of millions to get systems put together.”