Contrasting pre-paid and post-paid billing

Summary

Financially, revenue of fifty dollars, Euros, Rupees or Yen is the same whether collected from a pre-paid or a post-paid service, but each payment method requires different operational infrastructure and processing to support its billing.

Billers with pre-paid services:

Require high availability, higher-performance infrastructure since payment approval forms part of the real-time transaction setup and operation. All pre-paid transactions must be addressed immediately.
Must perform rating (and possibly taxation) correctly in real-time to ensure the correct amounts are deducted from customers' credit balances
Should continue to check customers' credit balances for some transactions (e.g. long-distance phone calls) to ensure that sufficient funds remain available
Need to terminate customer transactions when pre-paid balances are exhausted, or ask for a real-time balance top-up to provide ongoing service.

Billers performing post-paid billing:

Can perform billing on lower performance infrastructure since processing is performed after the fact and does not form part of the transaction setup or operation
Can address peak period workloads across a wider time period ( 4 / 12 / 24 hours)
Can collect transactions from different networks to perform cross-product rating and discounting, and then apply taxation to the final price
Must perform active credit management of customers' charges to limit fraud and reduce debt that may become uncollectable

'Pre-paid' is an important payment method that can reduce collection costs and provide access to market segments that would otherwise be unavailable, but implementing it requires systems that operate slightly differently to post-paid billing.

Pre-paid and post-paid billing

Pre-paid billing is used to limit a biller's financial exposure to non-payment and allow access to customer segments with limited funds or no access to credit cards. Pre-payment is used in a wide range of businesses such as road tollways (e.g. Citylink), mobile phones (e.g. virginmobile) and online music stores (e.g. iTunes). Pre-paid credit balances reduce to zero limiting both the customer's spending (attractive to some customers) and the biller's revenue (less attractive to the biller). The customer is reassured by knowing their spending is capped, and the biller can implement 'recharge' channels for customers to easily top-up their balances to allow further spending.

Services provided using a pre-paid payment method are often pay-as-you-go (PAYG) without ongoing recurring charges. Customers' balances are reduced only when a chargeable event is performed such as a tollway journey or a phone call. Customers can carry their balances over until they actually need to incur usage (rather than being charged each month regardless). Billers seeking to increase their pre-paid revenue may charge higher prices (e.g. call rates for pre-paid products), expire payments (e.g. spend the $50 recharge within 6 months), or implement minimum spending limits each year (e.g. Citylink's $27.50/year).

Pre-paid billing may be used in mass markets where the biller has little scope for redress if payments are not made. Some billable services can be withdrawn on an ongoing basis (e.g. website hosting), but other products and services such as music downloads have limited scope to enforce post-paid payment. This problem is magnified when the biller's market is worldwide and subject to multiple legal jurisdictions.

Post-paid billing starts with an initial zero balance that is increased by charges as they are incurred. These charges are collated periodically and billed to generate a debt the customer must pay to continue receiving access to the biller's network. Post-paid services are more likely to be charged recurring 'access' and one-time installation charges alongside their network usage charges.

Since post-paid services are allowed to incur unlimited charges within reason, the payment channels employed can be 'slower' and processed overnight with little loss of revenue. The mechanisms can be similar to those employed for pre-paid processing, but there is less need for real-time payment processing (e.g. vouchers, real-time credit card payments). 'Slower' payment channels such as bank direct-debt, batched credit card charging, bank push-based payments (e.g. BPAY) and cash may be used.

Post-paid billing is suited to circumstances where the customer can be identified accurately and pursued for bad debts. To do this, accurate names, addresses and other identity details must be known. Aside from the threat of legal action, utilities can withdraw electricity and gas supply from a customer, local governments can apply liens for unpaid property charges, and tollway operators can apply fines against vehicles' owners traveling on their roadways.

Payment channels - Under both pre- and post-paid methods, the biller must determine which payment channels will be offered to customers to recharge their credit balances (pre-paid) or pay down their incurred debts (post-paid). Each channel's costs, ease-of-use, availability and timeliness will influence how and when customers can continue to use the biller's network (i.e. to incur additional charges). For example, a pre-paid mobile phone with a zero balance using a payment voucher to recharge its balance can make calls immediately, whilst one that must wait for an overnight direct-debit is of limited use until 'tomorrow'.

Billers may establish pre-approved authorisations to deduct money from customers' credit cards or bank accounts so that a sufficient credit balance / limit is always available. This approach is not suitable for situations when limited spending is intentional (e.g. children's mobile phones, customers on limited budgets), or bank accounts and credit cards are unavailable (e.g. children, 'credit challenged')

Pre-paid billing complexities

When transactions are performed against a pre-paid service the customer's balance must be checked to ensure sufficient funds are available. This processing places billing on the critical path necessitating high-availability and possibly redundant hardware and other infrastructure. Billers must also decide which default policy to apply when the customer's balance is unavailable - approve transactions and risk non-payment, or deny transactions and lose revenue when funds were available.

Since the 'correct' and 'final' total price will be deducted from the customer's credit balance, a biller's systems must rate and tax (where appropriate) the pre-paid transaction before, and as, it is performed. Rating and taxation must take all the same criteria used in post-paid processing into account including the transaction type, the customer performing it (e.g. negotiated rates), and the specific details required for taxation. Prices may be fixed (20 cents per call, 99 cents for a music track), or variable (22 cent flagfall plus 60 cents per minute, 12 cents per downloaded megabyte). This step will be easier for billers with a limited jurisdiction and product portfolio (e.g. tollways), but more complex for other billers (e.g. pre-paid mobile phone services that roam across different taxing jurisdictions).

The balance check's approval time (performance) is also important. For pre-paid phone calls, the balance check must be completed within the call establishment period or the customer will be (negatively) delayed until the approval is performed. In other circumstances, balance checks can be performed more slowly for purchases (such as content downloads) performed over the internet where customers already accept delays measured in seconds (whilst webpages download).

Aside from authorising transactions, billers can use balance checking to drive other messages given to customers. For example, tollways can trigger different 'beeps' from their transponders or flash signal lights at exits when a customer's balance requires recharging and no pre-authorised recharge arrangement exists. Customers can heed these messages to avoid the penalties for non-payment.

Some pre-paid transactions are fixed in value (e.g. SMS, song downloads at 99 cents) whilst others' value continues to accumulate (e.g. long distance phone calls, wifi data connections). Fixed value transactions can be authorised by one validation / authorisation call against the customer's credit balance. For accumulating transactions, an initial balance check can pre-authorise the transaction's start and an initial level of consumption (time, megabytes), but ongoing consumption requires repeated checks of the customer's balance to confirm (and further reserve) sufficient funds until the transaction (consumption) ends.

Repeated checking of a customer's credit balance must be used when multiple services deduct funds separately, possibly leaving insufficient money for later transactions. An accumulating transaction cannot assume the customer's initial balance will remain unchanged. By repeatedly checking, the accumulating transaction can confirm that sufficient balance remains, reserve that balance, and importantly stop the transaction when funds are exhausted. Stopping a transaction ensures the biller provides products and services proportional to the customer's funds and no more.

Since management of the customer's pre-paid balance is so important, the billing and network systems may be tightly coupled to achieve the necessary performance and reliability. This close coupling may leave limited opportunities to share customers' balances between different networks and product offerings. Siloed, duplicate infrastructure can result in a customer being in credit on one network and out of funds on a different network they wish to transact upon.

Pre-paid fraud can also occur and this places billers at risk of providing services for which no revenue can be collected and where the biller must still pay their business partners (e.g. content providers, interconnection charges). Examples of pre-paid fraud include stolen credit card details used to create a credit balance, excessive roaming charges incurred without reference to the customer's balance, and 'cloned' pre-paid mobile phones (used without their owners knowledge) that deplete the available funds.

Post-paid billing complexities

Since post-paid bill processing is performed after transactions have completed, there is wider scope for the billing infrastructure to be provisioned based on average, rather than peak, load processing. Transactions can be processed as system resources are available with delays possible at the busiest times of the day or year. This approach does not delay further customer transactions since post-paid billing plays no part in the initial or ongoing authorisation, and allows minor outages of billing systems to be tolerated without impact to customers or revenue.

Under post-paid billing, billers have more scope to aggregate transactions from multiple networks and perform cross-network pricing (rating) and discounting, with transaction rating and taxation performed at a pace dictated by a biller's investment level in their infrastructure. Infrastructure savings may be possible over the level required for pre-paid processing due to the lower performance needed to process transactions within a 4 / 12 / 24 hour window, rather than (for example) within a phone call's sub-second set-up period. Complex, slower processing for larger customers can be performed without affecting a customer's network experience.

If transactions from multiple networks are brought together, a customer's totals (e.g. financial balances, call minutes, download data allowances) can be shared across network types. For example, a family's account may be billed under a pricing plan that allows 1000 free minutes of long-distance phone calls to be shared across their four mobile phone and two fixed phone services.

Billers may apply credit limits to customers' individual services or aggregate the spending to the 'account' or 'customer' level to monitor and reduce the biller's exposure to bad debt and fraud. Billers may apply different credit limits to different customer segments such as residential, new customers, wholesale (reseller) and corporate accounts. Higher limits can be used for customers / accounts with habitual high spending, and lower limits can be applied to new customers, customers not expected to spend much, or those with a history of payment default or delay.

When a customer exceeds their credit limit, billers can evaluate the customer's spending and payment histories to decide whether the customer should have their service(s) suspended, be interim billed to generate a collectable debt, be contacted to notify (and confirm) excess spending, or be subject to ongoing monitoring and later reevaluation.

Challenges of pre-paid and post-paid billing

Mixing payment methods for the same products - Mixing payment methods generates difficulties in the biller's 'network' because some (pre-paid) products and services will require high-availability operation, balance management and real-time rating, whilst others (post-paid) will have their billing performed after the fact. Customers and/or billers might want to bill (stable) recurring charges using post-payment method, but charge all network usage against a pre-paid balance (e.g. children's phone calls and SMS).

Balance Management - Customers' balances for pre-paid credit and post-paid credit limits must be monitored. A pre-paid balance might also contain separate allowances for different product segments such as SMS, long-distance phone calls, or ringtones that must be managed (and limited) separately along with how products map to each allowance 'category'. Services under the same account may be configured to bill against different pre-paid and post-paid balances.

Traditional pre-paid processing operated balances aligned one-to-one against a network service - sharing a 'group' balance across an account / customer requires careful processing to ensure funds are deducted / reserved only once. This approach is required by tollways that allow multiple cars in the same household to deduct against a common pre-paid balance.

Payment method migration - Customers, products and services can move between using the pre- and post-paid methods. The biller's systems must address the network, financial and pricing implications of these movements.

Siloed processing - Products and services that were performed traditionally using a post-paid payment method may not use technical architectures suitable for supporting pre-paid processing. Product families separated into isolated processing silos may not be capable of (easily) interacting with external systems within the timeframes and with the availability required for pre-paid processing.

Wholesale and retail services - Billers may resell their network to other retail providers. In these networks each network service's ownership must be tagged explicitly as being 'owned by' / 'belonging to' either the biller's retail division or one of their wholesale (reseller) customers. Some networks (e.g. telecommunications) may segment their offering further and allow a service's products (e.g. local calls, long-distance calls, international calls, calls to mobile phones) to be resold by different retail providers (resellers). Resold services will not be 'owned' by the biller's retail division, necessitating careful processing for 'customer privacy' and reseller 'business confidentiality', and billing may be performed using different billing policies (e.g. disconnections), pricing and migration (churn) rules.

Pre-paid variations

Tollway - A customer's pre-paid limit may include a financial buffer (e.g. $5-10) that allows additional (funded) journeys to occur whilst the tollway operator recharges the customer's balance automatically from a credit card or by direct debit. This provides the tollway operator with a continuous line of credit that can be drawn upon without reference to, or the involvement of, the customer.

Pre-paid ISP / Mobile Data - When a customer's pre-paid access time is exhausted, a splash screen can be sent to the customer whilst they are still connected allowing them to top-up their pre-paid balance by credit card, voucher or another payment channel (e.g. charged to their hotel room). Once a suitable balance has been re-established, the customer's internet / mobile data session can continue from the point at which it was 'interrupted'.

Tags: Billing, Pre-paid, Post-paid, Prepaid, Postpaid