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Feb 14, 2003


Ed Maldonado

It is the subject that looms around the industry every day that no one really talks about: "What do I do if my carrier tanks entirely?" A few years ago this question was hardly considered by most in the prepaid industry. However, in the wake of facilities-based carriers such as Global Crossing, Qwest, MCI WorldCom, and many other lesser known carriers traveling the road of the US Bankruptcy Receiver, the repercussions of lost service or lost receivables affecting day-to-day business are very real for those in prepaid. So then, what do you do? The answer truly depends on what services you sell, or, where you stand in the chain of services being affected by the carrier shut down or closure. The liabilities and recourses of resellers are different from those of prepaid providers that are offering their own services along with private labeling to other distributors. To have any meaningful discussion on what priorities and courses of action should be considered, a particular segment of the business must be chosen. This in mind, let's consider just the prepaid calling provider caught in the chain of collapse and use this hypothetical.

Let's consider the prepaid calling provider caught in the chain of collapse.


Imagine for a moment you are Average Prepaid Business, Inc. ("APB") - a nationally recognized prepaid calling card provider who just launched a card with the lowest packaged rates to Asia, Latin America, and Africa. The success of the "Connect-Anywhere-in-the-World-Cheap" calling card has rocketed sales up this past month with next month's projections calling for double that number. This did not happen by chance. You are no novice to the prepaid business having learned much over the years. You have based your market strategy on being entirely switchless and capturing the lowest rates available and you control your own 800 inbound numbers. You even had the savvy to get your own certification to provide prepaid cards in a number of states and implemented your own customer service to meet your market growth. The reality is that your prepaid products, after years of sweat and hard fought competition in the marketplace, are finally making decent margins across the entire country. Life is relatively good, almost normal, and then…the call comes.

Your underlying carrier, the one with those fantastic rates supporting your best selling card, well, they just went down - and not just in service. People in the industry have been talking about problems with this carrier for months, but you know how this business is with gossip, so you sloughed it off as idle chatter. Now, as the words "permanent shut-off" and "receivership" are still echoing through your ears, the realization that you have more than 30,000 cards on the streets, in your home state alone, finally hits. Unfortunately this is not a very private moment, because by this time that one phone call has evolved into a wave of calls from distributors, merchants, and consumers alike. Panic throughout your operation grows and you need to make difficult choices now.

Although the plight of APB is entirely imaginary, it serves to illustrate how issues can compound quickly for prepaid providers when a critical carrier goes down. More than any other player in the chain of service, the prepaid service provider is in front of both consumers and distributors on a daily basis. In the hypothetical case of "APB," calls and complaints of lost service have already begun, and are certain to continue until refunds are given to consumers, or, service has been re-established for cards already on the street. APB is a licensed prepaid calling provider in certain states. This state certification is a legal requirement that carries with it both responsibilities and regulatory recourses of action for prepaid providers. Most states require that consumer complaints be documented and refunded or credited, and prescribe a "reasonable" time in which this refund or credit must occur.

At this point in our saga of APB, consumers have not yet complained to any utility commissions, otherwise the commissions themselves would initiate an inquiry to APB or, worse, file a docket on the matter. This could change as the situation unfolds, depending on how quickly APB can re-establish service to the cardholders on the street, or provide refunds or credits.

Likewise, the lack of licensing is some states in which APB distributes cards may complicate the situation even more if service is not re-established in a reasonable time. Finally, there is the reality that APB has invested heavily in a prepaid branded product tied to the rates of a single carrier, enabling APB to achieve deep market penetration in a short period of time. Had APB dealt with a licensed carrier, there could have been some notice requirements that would have applied to the timing of shut-offs, giving APB time to change service. This does not change the economic liability to which APB will be exposed, however. Service needs to be re-established to those calling cards already sold, but the question of where to begin and what to prioritize to limit potential liability is daunting.

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The question of where to begin... is daunting.


Each provider's exact course of action in this situation will vary depending upon how they have structured the elements of their prepaid business and their dealings with the specific carrier. Successful recoveries are usually based on four paramount priorities that are well organized:

1. Accounting of PINs and documentation of any lost service through customer service.
2. Contracting of replacement service(s) within short time frames.
3. Realistic expectations on re-connection and transporting of PINs to the new carrier(s).
4. Identifying the legal and regulatory issues to be addressed during reconnection, not afterwards.

The order in which these priorities are addressed, and how thoroughly they are dealt with, can vary from organization to organization. The key factor is isolating these priorities and organizing the recovery process as it is occurring - and not simply reacting to emergencies. Some contingency planning by the prepaid provider is always helpful; but simply being aware of the issues involved can make a difference.

1. Documentation: accounting, & customer service.

As seen in the hypothetical case of APB, a prepaid calling provider may not be completely aware where their cards have been distributed. They may be dependent on the knee-jerk reaction from unhappy distributors, merchants and consumers to estimate the extent of their losses and liability. Successful recoveries from a carrier disaster usually involve an immediate audit of activations.

This activation audit has two basic reasons. First, to identify the PINs that will need to be transported to the replacement carrier. Second, to inform distributors and merchants holding any un-activated cards not to release those cards into the market until replacement services are engaged. Many small prepaid service providers are sophisticated enough to have automated accounting systems. This is not meant to be an excuse in this situations, but the quicker the provider can discern what cards, and PINs, are un-supported, the quicker that liability can be limited. This process may involve some labor intensive hours but it is time worth spent. A full audit to assess
losses and damages can be done later, after service has been re-established.

In our example, APB provided customer service for its cards. Few switchless providers actually do this on their own, and usually contract out these services. Many times it is the primary carrier who performs this service, but more often it is to a contracted third party service bureau or call center that manages customer calls. In any case, customer service is typically the front line of defense, documenting calls and communicating with consumers. The minute that the service is interrupted to the consumer, the conceptual clock of consumer and merchant dissatisfaction begins to run. This has both economic and regulatory considerations as time drags on before the re-connection of service. Should cards and PINs identified as active, not be re-activated within reasonable timetables, utility regulators may step in, while merchants will stop selling that brand of card altogether. Successful recoveries involve a proactive use of customer service in communicating when credits, refunds or service will be given. A carefully drafted script explaining the circumstances of the service interruption, and the estimated restoration time can limit the escalation of dissatisfaction issues, giving the provider more time to concentrate on other priorities.

A final consideration under this priority is found in the hypothetical of APB, who is a licensed provider of prepaid calling cards. Every state has requirements specifying how prepaid customers MUST be handled by the service provider to maintain its certification to offer prepaid services. As most providers know, or at least recognize, state certification is a mandatory requirement where a branded card is consumed by the public of that state. Accounting and documentation through customer service can be used to show compliance, and that restoration efforts are in progress, to prevent regulatory actions from being commenced while services are being re-established.

2. Contracting for Replacement Services.

Prepaid service providers instinctively react to a service interruption by immediately surveying pricing for replacement carriers. While matching the pricing of the previous carrier is important, ease of re-connection and quality of service thereafter must also be considered. Contracts can be entered into quickly in these circumstances; the key factor is having a carrier that will work with you as efficiently as possible. Re-activation of PINs is a critical issue to recovery and may need special attention under an amendment or exhibit to the contract. General provisions will guide ongoing terms in the future, but amendments and exhibits can specifically address timelines and traffic volumes.

Based on the lessons just learned by this experience, it may be time to diversify your carriage, and not try recover with just one carrier. This comes down to the provider's own cost analysis: money lost while service is out versus savings made after service is re-established. Successful recoveries often include a combination of these factors depending on how quickly the provider surveys other carriers after their original carrier is lost. The most important priority is that a replacement service is engaged, and that a timeline to re-connect service on activated PINs and cards is set, and communicated to distributors, merchants and consumers alike.

The most important priority is that a replacement service is engaged.

3. Technical Re-Connection.

Technical considerations are limited in the case of a pure switchless provider such as APB, because APB is not utilizing or provisioning its own switch. This does not change the necessity to have realistic expectations for re-connection and transporting of PINs to the new carrier. While technology through VOIP and soft switches have improved timetables,
technical re-connection of service still involves three basic processes for the switchless provider:

1. Removing PINs from the original carrier and programming at the new carrier.
2. Pointing the toll free 800 provider to the new carrier.
3. Testing for service quality.

In the hypothetical of APB, a sudden catastrophic carrier loss occurred, leaving little time for coordinating all the technical issues. While this can occur, most of the time, some notice is given prior to a complete cut-off. Communication with the original carrier usually continues in order to coordinate the re-programming of the PINs. Sticking to the necessary timelines is the most critical factor at this point. Although these issues may be established in the contracts between your original carrier and your new carrier, the attentiveness - or lack of it - of your original carrier to actually transport the PINs can backlog any reasonable timetable. The key factor of any successful recovery is that the prepaid provider is diligent in their follow-up with both carriers, and documents the follow-up.

In the hypothetical case of APB, they had control over their 800 access numbers, making it easier for them to transfer the PINs to the replacement carrier. This is not always the case. Unreasonable delays can occur which will cause damage to prepaid providers. If this occurs, and is undocumented, it can complicate and delay subsequent legal recourse. The liability to consumers who have already purchased cards and want refunds or credits is also increased by such delay. Document all orders, requests and errors. While email is fast and convenient, faxed documentation often is a better paper trail option for the purpose of litigation. If problems do develop, communicate them immediately to customer service so that no false expectations are created on the part of distributors, merchants and consumers.

4. Legal & Regulatory Issues.

By their very nature, the loss or catastrophic loss of a carrier has both legal and regulatory implications from day one. These issues can range from the limitation of liability to proper conduct under the circumstances. Business losses, incurred expenses, and damages will be involved, however successful recoveries depend the effective use of legal counsel and business advisors. Not all legal issues that arise at the time of the carrier loss can be addressed immediately. Some can, and must, play out before there is legal recourse. Identifying the legal and regulatory issues to be addressed during, not after, re-connection is paramount. If activated cards and PINs are on the street, service must be re-established, credited or refunded. Most state regulations require this for the protection of the prepaid calling consumer. Providing the service, or making refunds or credits is
an obligation under state certification for prepaid service providers. Your licensing in those states, or lack of it, may come under scrutiny by public utility commissions as well.

Other legal considerations include:
the nature of the carrier's actions prior to the loss of service, did they mislead or deceive, is the contract unclear in such circumstances, did the carrier provide improper notice? These are all legal issues to be addressed after you have fulfilled your responsibilities and commitments to consumers. Contacting legal counsel versed in both litigation and regulatory matters can be critical. However, you should pick your issues carefully because, as with almost all services, time is money. Each instance of carrier loss is unique, so communicate your most immediate particular concerns first, such as problems in accounting of activations, the proper form of documenting complaints, negotiation of the Replacement Service Contract, and technical errors of the carrier and possible negligence. Thereafter, concerns of overall damages and losses can be addressed.

Create a plan for the unexpected because it sometimes does happen.


While these immediate priorities are helpful constructs during a critical hour, they are not long-term solutions. It is important to be aware of the immediate priorities, but contingency planning before an event may be just as important. If you are a small operation, talk with your partners and employees about these issues and conduct an extensive "what if" review. Large operations may want to consider a prioritized policy or even make a tentative plan with elements tailored to your client/consumer base, product penetration, and service offerings. In most states, licensing and compliance are mandatory for the prepaid businesses and products you offer. License and comply ahead of time and not when you are the most vulnerable. Find out what they require by contacting a lawyer or business advisor who can intelligently brief you. Then, create a plan for the unexpected because it sometimes does happen - particularly in prepaid.

For those of you that may be wondering what the fate of the hypothetical APB was, did it recover, or lose? Perhaps it was born to lose, so you don't.

Good luck & success in the industry!

Edward A. Maldonado, Esq., a principal of the Regnum Group, is a telecommunications attorney based in Miami, FL who represents and advises communication companies both in the US and Latin America. He can be reached


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