No longer just a 'poor man's contract', prepaid eats the world

Legend has it that prepaid cellphone accounts were invented in South Africa, and went on to rule the world of low-income mobile users.

The reality is that South Africa was just one among many countries where prepaid was seen as a solution for serving customers who could not get credit and so did not qualify for contracts.

When it was shown that prepaid customers were often more profitable than those on contract because bad debt was nonexistent, the concept spread like a virus.

Fast-forward two decades, and it is invading other industries and utilities, from travel ticketing to electricity supply.

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Last week, 15-year-old prepaid leader Blue Label Telecoms reported R13.2-billion in revenue for the half-year ended November 30, and R1.1-billion in gross profits. Among the staggering statistics revealed in its results presentation was the activation of 700000 new SIM connections a month, in a depressed market, and sales of more than 30million bulk-printed prepaid vouchers a month.

If it was obvious back in 1996 that this was the future, how did a company founded in 2001 rule the market?

"Part of our success is that it was very clear in our heads, from the start, where we were going," says co-founder and joint CEO Brett Levy.

"Our vision and strategy in 2001 was almost identical to what it is today. We believed that every human being on earth would eventually transact on at least one prepaid mechanism, and every service on the planet would go prepaid.

"When we told people that, they said we were mad, that it would begin and end with telecoms. Fifteen years later, there is hardly a person who is not transacting on prepaid; often they just don't know they are. If your kids use iTunes, you don't buy songs for them; you buy a prepaid card in a store.

"You're seeing a move away from the actual word, because it was synonymous with 'a poor man's contract'. They've got fancier with names, but the product is the same."

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The reason for the rise of prepaid is simple, says Levy.

"If you're a big guy, whether a bus company, a telco, or electricity supplier, you get paid upfront for a product you deliver in future. There's no bad debt, and you charge more because you're not rewarding a customer for loyalty."

Merchants are big winners, as they sit between the supplier and the customer, but no longer have to carry stock. Instead, the product resides in the cloud, delivered on demand. The model is beginning to transform the way small businesses such as spaza shops are able to operate, but even giant retailers benefit enormously.

"That point-of-sale terminal, which takes up 30cm on a desk, is making up 70% of a merchant's total profit - and they hold no physical stock of the product. For the first time, a spaza shop can compete with Massmart, because they can have exactly the same range and product - and can even be cheaper."

Both consumer and supplier are driving the world to prepaid.

"In a postpaid world, you never spend what you intended. In prepaid, you spend exactly what you intended. Now you can budget your life. Our vision is that this is only the beginning. As more people get smartphones in their hands, as more people use apps, it will just speed up."

Goldstuck is the founder of World Wide Worx and editor-in-chief of Gadget.co.za. Follow him on Twitter @art2gee