A prepaid mobile phone (also commonly referred to as pay-as-you-go, pay-as-you-talk, pay and go, prepaid wireless, or prepay) is a mobile phone for which credit is purchased in advance of service use. The purchased credit is used to pay for mobile phone services at the point the service is accessed or consumed. If there is no available credit then access to the requested service is denied by the mobile phone network. Users are able to top up their credit at any time using a variety of payment mechanisms.
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 (generally lasting 12, 18 or 24 months) or short term (also commonly referred to as a rolling contract or a 30-day contract), billing arrangement with a mobile network operator or carriage service provider (CSP).
"Pay-as-you-go", "PAYG", and similar terms are also used for other non-telephone services paid for in the same way.
- 1 Overview of the prepaid service
- 2 History
- 3 Prepaid versus postpaid mobile services
- 4 Churn
- 5 Prepaid mobile phones and roaming
- 6 Privacy rights and prepaid mobile phones
- 7 International prepaid mobile phone branding
- 8 Financial accounting issues arising for operators
- 9 Usage
- 10 See also
- 11 References
Overview of the prepaid service
A prepaid mobile phone has access to most if not all of the services offered by a mobile phone operator, although the charges for these services may differ from customers with the same operator who have a postpaid contract.
In addition, a prepaid phone has a balance which can be queried at any time, and also topped up periodically. Examples of ways in which the balance can be topped up are the following:
- a credit card or debit card
- direct from a bank account using an ATM
- in a retail store by purchasing a "top-up" or "refill" card at retail. These cards are stamped with a unique code (often under a scratch-off panel) which must be entered into the phone in order to add the credit onto the balance.
- in a retail store using a swipe card where the balance is credited automatically to the phone after the retailer accepts payment.
- from other mobile phones on certain networks which provide international top-up services, where the initiator of the top up is often a migrant worker wanting to add minutes to the prepaid mobile phone of a family member back home.
- direct from some open-loop prepaid cards featuring a mobile refill service.
- through electronic reloading where a specially designed SIM card (Retailer's SIM card as used to define in the Philippines and India) is used to reload a mobile phone by entering the mobile number and choosing the amount to be loaded. This process is widely implemented in the Philippines and India so that any person can be a prepaid load retailer creating a nationwide availability of reloading stations, even in remote areas.
Credit purchased 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.
There is no compulsion on a prepaid mobile phone user to top up their balance. To maintain revenues, some operators have devised reward schemes designed to encourage frequent top ups. For example, an operator may offer some free SMS to use next month if a user tops up by a certain amount this month.
Unlike postpaid phones where subscribers have to terminate their contracts, it is not easy for an operator to know when a prepaid subscriber has left the network. To free up resources on the network for new customers, an operator will periodically delete prepaid SIM cards which have not been used for some time, at which point their service (and its associated phone number) is discontinued. The rules for when this deletion happens varies from operator to operator, but may typically occur after 6 months of non-use.
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.
The history of the prepaid mobile phone begins in the 1990s when larger markets were being sought after by the mobile phone operators. Before this date, all mobile phone services were offered on a post paid basis, which excluded people with a poor credit rating.
The first pre-paid card was called "Mimo" and was launched by TMN the Mobile Phone Operator of Portugal Telecom in September 1995.
Prepaid versus postpaid mobile services
Advantages of prepaid
A prepaid plan may have a lower cost (often for low usage patterns e.g. a telephone for emergency use) and make it easier to control spending by limiting debt and controlling usage. They often have 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 age of majority). Depending on the local laws, they may be available to those who do not have a permanent address, phone number, or credit card. This makes them popular amongst students away from their home towns and travelers. Additionally, they are popular with parents who wish to have a way to stay connected with their college age students but do not want the surprise of an unexpected and lofty bill.
Disadvantages of prepaid
Sometimes, pay-as-you-go customers pay more for their calls and SMS messages, and in some cases they 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 usually the results of a system deficiency whereby the prepaid system used by the wireless carrier as technology has evolved to the place where all this is easily managed by triggers and/or APIs to 3rd party solution providers (data, international LD, content, roaming). Current models being deployed by wireless carriers today are capable of setting the price points for all services on an individual basis (via packages) such that higher pricing is a marketing decision. The days of higher pricing being due to more expensive network costs no longer apply.
As described above, prepaid accounts require that a subscriber have funds in the account to make outgoing calls (except emergency calls which are always allowed). In the US incoming calls are also barred while in some other countries a prepaid mobile with zero balance may still receive calls and texts.
This results in an "on/off" or "all or nothing" proposition for the prepaid service providers and their clients (that is, the account either has enough credit to use the phone, or it does not). Some operators (for example Orange) allow their pre-pay customers to have a small negative balance to allow short calls or texts when the customer's credit has been completely used. This is then deducted when the customer next adds more credit.
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". Like other service providers, mobile service providers losing a mobile account call it "churn."
Prepaid mobile phones and roaming
In the early years, prepaid mobile phones could only be used within the operator's network who the customer purchased the phone from. It was not possible to roam onto other GSM networks when using the phone abroad. This was because the operator had no way to bill calls in real time from another network.
However, most prepaid phones now offer roaming using one of the following methods:
- the prepaid mobile phone user dials a "trigger" number from the foreign location using a USSD message which is not charged for while roaming. Upon receipt of the USSD, the customer's operator will then return the call. When the service calls back, the user is being charged for the cost of the service from the credit available in the home network. The service will then prompt the user to enter the dialed number of the party to be called. The disadvantage of this method of roaming is that the user will not be able to dial numbers directly from the handset. The advantage is that it works in almost all locations around the world since USSD is ubiquitous and free.
- the user can direct dial from their handset if the network they are roaming in supports CAMEL (Customized Applications for Mobile networks Enhanced Logic). This allows real time billing by the home operator without having to dial the customer back. The advantage is that it is more natural and works seamlessly. The disadvantage is that not all networks support CAMEL so the list of countries where a prepaid customer can use their phone abroad is smaller than for postpaid mobile phones.
Privacy rights and prepaid mobile phones
A concern of police and security agencies worldwide is that prepaid mobile services allow the user to be anonymous and therefore facilitate criminal, or terrorist activities. Prepaid phone users can be anonymous for two reasons:
- the prepaid SIM card can be sold in a shop like any other goods. There is no need to register them at point of sale, unlike postpaid phones who have to credit check the user before allowing them to purchase and enter into a contract.
- Because prepaid services can often be topped up using cash and vouchers, there is no way to trace the payment and hence determine the identity of a prepaid phone user from payment records.
A prepaid phone specifically purchased to be used briefly and then replaced is known colloquially as a burner phone or burner.
It has been suggested that a solution to this problem is to register the users of prepaid mobile phones. Such legislation faces heavy opposition from providers and consumers of prepaid service, as many consumers who desire privacy for legitimate purposes or simply by personal preference find anonymity to be the primary selling point of prepaid phones. According to a 2005 study 9 of 24 surveyed OECD countries require prepaid mobile users to register. These countries are Australia, France, Germany, Hungary, Japan, Norway, Slovak Republic, South Africa and Switzerland.
The freedom and privacy allowed by prepaid cell phones might help circumvent government oppression and censorship, allowing improved reporting and coordination of dissidents under oppressive regimes.
While there is no doubt that criminals and terrorists use telecommunication services, to date there has been no public study that has clearly examined the possible link of non-registration of prepaid mobile phones to greater risk of criminal or terrorist activities. However, mandatory registration may be a breach of a prepaid user privacy, and currently the question various jurisdictions have decided on or are examining is whether this privacy breach is an appropriate action versus the threat that anonymous usage of prepaid services pose.
International prepaid mobile phone branding
In an effort to differentiate the prepaid from post-paid service for their customers, CSPs have branded prepaid services differently from the post-paid services.
A variant of post-paid service has emerged in recent years that comes closer to the prepaid service, by offering a "pay monthly" contract.
Prepaid phones and SIMs in the United Kingdom are known as "Pay as you go". 
Financial accounting issues arising for operators
Prepaid services pose a number of challenges for the accountants at the mobile phone operator.
The financial statements for the company must treat prepaid services differently from their postpaid services. When a user makes a top up payment, it may not be declared immediately as revenue for the business. Instead it is treated as deferred income and only enters the accounts as income once services are actually consumed. The sum of the unused balances from all customers effectively is treated as a liability in the balance sheet. Since the unused balance remains as a liability on the balance sheet until consumed, it is commonplace to set a life cycle (perishable quality) on the amount of the top up, whereby any unused amounts will be swept from the account converting them from a liability to income. Typically, the larger top up values will have a longer time to be consumed before expiring and being swept.
Another issue is the treatment of VAT for operators in the European Union. Typically a prepaid top up will attract VAT in the home country at the point of sale. However, roaming calls made between countries in the EU are treated as a trade in services between EU members and are hence subject to VAT reversal on the wholesale level.
Sometimes the operators proposition itself has unintended side effects on the financial statements. For example, the top up rewards described above encourage frequent top up. However competition between operators in some cases has pushed rewards to the point where a customer can get the majority of their calls and text free by topping up a certain amount each month. This makes it harder for a user to "burn through" their balance and allow the top up revenue to actually enter the operator's books as revenue. Current prepaid solution providers are now able to manage each top up individually to avoid such loss of accounting control. The business rules set by the wireless carrier will dictate the circumstances when/if earlier top ups could have their perishable dates extended.
Usage of prepaid cellphone service is common in most parts of the world. Around 70% of customers in Western Europe and China use prepaid phones with the figure rising to over 90% for customers in India and Africa. 23% of cellphone users in the United States were using prepaid service as of 2011, a share that's expected to rise to 29% by 2016.
- Postpaid mobile phone
- Personal Handy-phone System
- SIM card
- Mobile broadband
- Pay by Credit card
- up at a cash machine
- Euronet Worldwide Launches ATM Recharge Services for Hungary's Largest Mobile Operator. - Free Online Library. Thefreelibrary.com (2002-02-05). Retrieved on 2013-08-20.
- Top up for Prepaid mobile or mobile broadband | Vodafone NZ. Vodafone.co.nz. Retrieved on 2013-08-20.
- Prepaid Wireless Plans
- [dead link]
- Pay as you go
- Pay as you go
- Cyrus Farivar (2012-06-14). "Die, contracts! Prepaid mobile phone use surges". Arstechnica. Retrieved 2014-07-24.
- Brian X. Chen (2012-08-02). "Prepaid Cellphones Are Cheaper. Why Aren’t They Popular?". The New York Times. Retrieved 2014-07-24.