The increasingly fuzzy line between prepaid and postpaid plans: How Australian mobile phone plans got so complicated

In the decades since mobile phones were first available in Australia, the process of choosing a connection service plan has become more and more complicated as a result of innovations by the service providers. This post explains how this happened and sets out the differences between the different types of products that can be encountered in the market. Where things have got especially complicated is in terms of where the dividing line between ‘prepaid’ and ‘postpaid plans is drawn.

Originally, the two categories of service plans had been simple to differentiate. With what I shall label as a ‘traditional prepaid plan’, the consumer purchased a block of credit for say, $30 and was recorded as having credit of the same notional amount (in this case, $30) against which usage would be charged. When the credit was used up, the consumer had to ‘recharge’ by purchasing a new block of credit, for the same plan or for a different one on the provider’s recharge menu, in order to keep using the provider’s service. Alternatively, the consumer could switch at any time to a different provider, with no financial exit penalty aside from the loss of any unused credit. Credit typically had an expiry date of 28, 30, 60, 180 or 365 days and any credit not used up by the expiry date would be deleted from the consumer’s credit balance unless the provider’s offer stipulated that it could be carried forward so long as the consumer purchased a new block of credit from the same provider before the existing expiry date arrived. In other words, with a traditional prepaid plan, all services were paid for ahead of being used and if the consumer has no credit, it is not possible to make calls (except emergency calls), send text messages or use the Internet.

By contrast, what I will label as a ‘traditional postpaid plan’ worked like a traditional landline phone account: there was no upfront payment and at the end of the billing period (typically 30 days), the consumer received a bill whose size was determined by the usage rates of various service items and their unit charges. Unlike a traditional prepaid plan, a traditional postpaid plan offered considerable potential for ‘bill shock’, for the service would simply continue as the consumer notched up unusually heavy usage on a traditional postpaid plan, whereas a consumer on a traditional prepaid plan would be prompted—by running out of credit much earlier than usual—that he or she was making unusually high use of the service.

Even with these traditional prepaid and postpaid plans there is scope for confusion or for the practical difference to be blurred. Consider a product labeled as a ‘pay as you go’ (PAYG) mobile phone plan: is this likely to be prepaid or postpaid? A $2 mobile phone call made after buying a block of credit for $30 is not a PAYG call in the way that a call at an identical unit price from a public landline callbox after inserting a $2 coin is a PAYG call: until any further use is made of the prepaid credit, the consumer is extending $28 credit to the provider and risks losing it. Such a risk arises because the provider could go out of business or the consumer turns out not to need to use the service before the remaining credit expires. Given this, perhaps a traditional postpaid plan is a better candidate for being called a PAYG service: the consumer uses the service and is temporarily given credit by the provider, until the next bill’s payment deadline: use more, and you get a bigger bill quite soon after. In practice, however, what the providers call ‘pay as you go’ products are normally prepaid services, though occasionally providers offer PAYG plan that can be prepaid or postpaid: for example, Amaysim’s longstanding PAYG plan can be operated as prepaid, with unused credit expiring after 365 days, or as postpaid, with a monthly bill..

Prepaid customers originally used top-up vouchers (typically purchased in supermarkets or newsagents), or manual credit card payments, as the method for making credit recharges. When customers were offered, and opted to use, facilities for automated top-ups from their credit cards if the credit balances fell to a particular trigger level (say, only $5 remaining), the difference between the traditional prepaid and postpaid plans in terms of financial risk began to get blurred. Once the consumer acceded to the latter method of recharging, there was financial risk, with the ‘bill shock’ not coming from a mobile phone bill but from an unexpectedly large credit card debit balance.

A second form of blurring came with the introduction of ‘monthly’ postpaid plans as an alternative to the 12- or 24-month ‘contract’ postpaid plans that had been the norm. With a ‘monthly’ plan, the consumer is able to terminate the contract at the end of any billing period without incurring any penalty charges. However, the consumer is still vulnerable to ‘bill shock’ after a month of heavy usage, unlike a consumer who uses a prepaid plan and does manual recharges.

Before ‘monthly’ plans appeared, however, matters had been severely blurred with the invention of what were originally presented by providers as ‘cap’ plans. The term is no longer allowed in Australia, for ‘cap’ had a very different meaning in this context from its usual connotation. (However, whilst the term has been banned, the format of plan to which it was attached is very much alive and well.) The use of a ‘cap’’ in relation to pricing is perfectly fine where, say, a vehicle manufacturer offers ‘$250 capped prices for each of the first three 15000km services’: here, the maximum the consumer will pay for getting the car serviced over 45000km is $750. By contrast, when first used with postpaid mobile phone services, the ‘cap’ concept referred to a limit on the amount of service the consumer received without incurring overage charges at penalty rates. The providers concealed the fact that they were, in effect, operating a two-tier pricing system by making the ‘cap’ part of their plan a prepaid element with only the overage charges being postpaid. Thus the consumer’s monthly bill would be for the coming month’s prepaid element and the past month’s overage charges; if there were no overage charges, the bill was just a prepayment—but, unlike a prepaid plan, a ‘postpaid cap’ was a service with potential for ‘bill shock’ of a particularly nasty kind because of the penal pricing of overage charges. In other words, instead of entailing a limit to one’s bill, the ‘cap’ was the point at which one entered the territory of potential for ‘bill shock’.

The two-tier nature of a postpaid cap plan’s pricing system was concealed via the consumer being told that, for their basic monthly fee (say, $30) they received some multiple amount of credit (say, $150), commonly called the amount of ‘included value’, against which usage would be charged at the same set of unit prices that would be used for overage charges. In effect, then, a call whose unit price was $0.90 per 60-second block cost only $0.90*30/150 = $0.18 so long as the consumer has not exhausted the included value that has been pre-purchased. But once the included value had been used up, the call really did cost $0.90 per 60-second block.

The seemingly generous inclusions of the postpaid cap plans made the notional prices of within-cap usage look acceptable: using such a plan was like paying for the capped part of the service in a different country whose dollars were worth far less than one’s own currency, but with the foreign country having a far cheaper cost of living. However, the two-tier pricing systems used in cap plans made them harder to compare with traditional prepaid plans in terms of value for money. To deal with this, the providers innovated again by offering ‘prepaid cap’ plans. These had the same kind of arrangement as their postpaid counterparts did in the way that the amount spent on credit yielded an amount of ‘included value’ that was a multiple of the amount spent. However, the prepaid caps did not have two-tier pricing and the associated ‘bill shock’ risks. Rather, when the included value had all been used, it was time to ‘recharge’ with a fresh purchase of credit and its associated included value.

Postpaid and prepaid cap plans have come to included variations whereby, in addition to a fungible amount of ‘included value’, they have specific inclusions, such as a data allowance, with any excess data usage then being charged at a specific unit rate per MB against the fungible included value (if any remains) or, in a postpaid cap, as an overage charge. With the shift in focus to data inclusions in recent years, cap-style plans that include unlimited standard domestic calls and SMS messages, in addition to a specific amount of data, have become increasingly common.

Given this evolutionary sequence, it becomes easy to see what one innovative provider, namely, TPG was trying to do around 2009 when it introduced plans that it characterized as ‘neither prepaid nor postpaid’. It offered both PAYG and cap plans, the latter with specific additional inclusions, but it broke with convention by its rules in relation to what happened when the pre-purchased credit had been used up. With a prepaid plan, the user simply purchases a fresh block of credit/included value whenever they wish, if the existing block has run out or is about to do so; impecunious customers who run out of credit may thus opt to be unable to make outgoing calls and SMS messages, or to access the Internet, until they can afford to recharge their mobile phone accounts. By contrast, TPG customers were required to forego this discretionary choice, for if they ran out of credit their service would continue with the aid of credit from a prepaid buffer whose amount they had nominated on signing up for the service (minimum $20). If the buffer shrank to a particular trigger amount (originally $5, later $10), the user’s credit card would automatically be debited to restore it to the nominated value. This could happen multiple times in a period of very heave usage. Charges against the buffer would cease when the next regular block of credit was debited against their credit card, again by an automatic deduction.

This was a clever design for limiting TPG’s exposure to bad debts whilst limiting its customers’ risks of being caught without any credit on their phones. The automated buffer and top-up system made TPG’s plans operate more like a postpaid service where the bill is paid by direct debit over a regular billing cycle. The TPG plans did not allow users to make irregular recharges of normal blocks of credit/inclusions, such as making 26 credit purchases in a 24-month period. TPG customers seemed potentially exposed to nasty surprises on their credit card statements, if not via the size of a postpaid bill at the end of any 30-day period, but the firm sought to reduce these risks by introducing an SMS messaging system that alerted customers to any imminent topping up of the credit buffer during the 30-day cycle.

By 2013, Amaysim and Yatango had imitated aspects of the TPG approach. Amaysim had supplemented its original, simple PAYG offer with 30-day ‘Flexi-Credit’ plans. If Amaysim customers ran out of Flexi-Credit, their outgoing and downloading service access would stop until the next auto-debit for a new block of it unless they had already purchased, or chose now to purchase, a block of PAYG credit. Yatango, an under-promoted, short-lived but good-value provider that went into voluntary administration in October 2015 (and was then bought by a new provider, Yomojo), followed a broadly similar model. However, Yatango went gone one step closer to the format of a postpaid cap plan by using a two-tier pricing system in which its PAYG services were charged at slightly higher marginal costs than those coming from regular prepaid credit. Presumably, this pricing system was designed to encourage customers to buy somewhat larger amounts of regular credit.

Despite TPG originally claiming that its plans were ‘neither prepaid nor postpaid’, the innovative TPG, Amaysim and Yatango service plans were classified as ‘prepaid’ in term of Australia’s Telecommunications Consumer Protections Code (ACMA, 2012, p. 18) so TPG now fits in with the regulatory requirements. According to the Code,

 

Post-Paid Service means a Telecommunications Product that can be used fully or in part prior to being paid for by the Consumer,

        whereas

Pre-Paid Service means a Telecommunications Product that must be paid for by the Consumer before it is used.

 

Clearly, in terms of these definitions, the TPG, Amaysim and Yatango plans were indeed correctly classified as ‘prepaid’, for customers could not use the services, once they had exhausted regular credit, without having pre-purchased additional credit to tide them over until the next purchase of regular credit fell due. However, the Code’s definitions seem constructed rather with the mind-set of the provider’s side of the market where the focus is the risk of not being paid where charges are billed after usage. With ‘cap’-style postpaid plans, fears of hefty overage charges may drive customers to opt for higher-tier plans than they really need, so that their monthly ‘included value’ is always enough to cover their usage (even if it might actually be cheaper for them to use plans with cheaper blocks of included value and occasionally pay overage charges). If so, these customers are always prepaying for their entire usage, despite being on plans that the Code classifies as postpaid.

 

Reference

ACMA (Australian Communications and Media Authority) (2012) Telecommunications Consumer Protection Code, C628: 2012, Communications Alliance Ltd, available online at http://www.commsalliance.com.au/data/assets/pdf_file/0017/33128/TCP-C628_2012_May2012-Corrected-July12.pdf

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