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Calling cards have progressed by leaps and bounds over the last 10 years, and it looks like the trend is continuing....Calling cards permeate the plastic collections of American consumers these days. These cards are offered with varied features and required access codes. Americans on the move use them with significant frequency and the market, sized by analysts at $8 billion, continues to grow robustly.
It is estimated that there are 160 million calling cards in the U.S. market today. Of this number, approximately 80 percent are issued by AT&T and the Bell operating companies (BOCs). There are also estimated to be 340 million credit cards in the hands of American consumers (see related article in this issue). Americans continue to be the most credit-oriented society in the world.
For many years the telephone calling card was referred to in the industry as a credit card. Calling cards are, after all, simply a specialized credit card. The recent convergence of calling and credit cards, which will be discussed later, should therefore not be surprising. In this article we will trace the evolution of the calling card market and examine what it means to independent public payphone (IPP) providers.
While most of the activity in the calling card market has occurred in the past 10 years, calling cards have been around for a long time. According to AT&T, the first Bell System Credit Card -- the first calling card -- was introduced in 1939. The cards generated a relatively low volume of business and were marketed chiefly to business travelers. The cards were made of cardboard and were reissued annually. To place calls using the card, callers were required to read the number to an operator.
Card numbering sequences were changed annually to reduce fraudulent calls. One of the digits in the sequence was matched to an alpha character that resided at the end of the number; this was the key to validating the card. Operators were trained to recognize valid card numbers from invalid ones by examining the alphanumeric key.
In 1980 Bell System calling cardholders experienced a change in the calling card process. For the first time, these cardholders were able to enter "0" plus the area code and number, followed by their calling card number. This mechanization virtually eliminated the involvement of the operator in the processing of most calling card calls. Since that time databases now store valid calling card numbers and personal identification numbers (PINs) which are accessed by the network to determine the validity of a particular calling card.
In 1983 AT&T issued the first calling cards carrying the AT&T brand name instead of the BOC name or Bell system name. These cards, which were issued in plastic, carried a magnetic stripe that was readable by the simultaneously-introduced AT&T Card Caller payphones that were equipped to read magnetic stripes.
When AT&T was required to divest the BOCs on Jan. 1, 1984, it was not uncommon for a cardholder to have both a BOC card and an AT&T card. Growing numbers may also have had an MCI or other interexchange carrier (IXC) card. At divestiture, and thereafter, former Bell system customers could use calling cards that were issued separately but which shared the calling card number between the BOCs and AT&T.
This "shared card" was required because the assets that were a part of the calling card validation database and the network signaling were not immediately divisible for AT&T and the BOCs. Known as the billing validation application (BVA) and common channel interoffice signaling (CCIS) systems, these assets were included with others that were not immediately separable. The undivided assets were covered by lease agreements that became known as "shared network facilities agreements." Most of these agreements were set to expire within 10 years.
Under this agreement, if the calls billed to the calling card were intraLATA in nature. the revenue belonged to the BOC. If the calls billed to the calling card were interLATA in nature, the revenue belonged to AT&T. Since the BOCs performed the billing for AT&T (under a similar agreement), this entire process was without serious significance to consumers. The biggest question for most calling cardholders was why they were now presented with two calling cards that displayed the same number but were issued by two different companies. Consumers seemed to adapt quickly, however, and shared cards seemed a reasonably simple solution to a problem of splitting ownership at the time of the complex breakup of AT&T.
While this was occurring for BOC and AT&T customers, other companies such as MCI and Sprint were issuing proprietary cards that were restricted to use on the MCI and Sprint networks. Whereas the BOC and AT&T calling cards were used by entering "0" plus the area code and the number, MCI calling card use required access through an 800 or 950 number. Sprint required access similarly through an 800 number.
In the period between 1984 and 1990, market dynamics changed precipitously. Operator service companies (OSPs) exploded onto the scene and began accepting AT&T's calling cards. These cards were also BOC cards, and were required to be billed by the BOCs under the non-discrimination rules of divestiture. The card could, therefore, be accepted by OSPs and be billed as a BOC card. AT&T cardholders were placing calls in the familiar 0 plus dialing protocol, but often to their chagrin their calls were being processed by non-AT&T companies. OSPs would process the calls from payphones, hotels or other locations and would arrange to bill the calls through the BOCs. This left AT&T with no revenue from the calls of their own cardholders. Furthermore, cardholders were expecting AT&T rates for the calls they placed. Many were surprised to find that the rates of many OSPs were multiples of two to 10 times AT&T rates. This further exacerbated the problem for AT&T. Many cardholders filed complaints with the Federal Communications Commission (FCC) and Congress.
Consumers were not the only plaintiffs. In 1988 the U.S. District Court overseeing divestiture issued a major calling card ruling in response to complaints by MCI and Sprint that BOCs accepted an AT&T card (shared use card) for billing of local and intraLATA calls, but the BOCs would not accept an MCI or a Sprint card for the billing of similar calls. The court's ruling on October 14. 1988 provided the impetus for more change in the calling card market.
The ruling by Judge Harold Greene gave IXCs three options for having their calling cards accepted by the BOCs. First, he stated that IXCs could issue shared cards and share their databases with the BOCs. Second, these IXCs could issue Caller Issuer Identifier (CIID) cards that were based on a 14 digit sequence that no longer matched the telephone number of the customer. Bell Communications Research was designated as the coordinator of blocks of numbers that were issued to each carrier to identify the carrier to whom the CIID card transaction belonged. Third, IXCs could use the internationally adopted CCITT (Consultative Committee for International Telephone and Telegraph) numbering system for calling cards; the system begins with the digits 891 and can contain 19 or more digits.
For the past several years calling cards issued by the regional Bell operating companies (RBOCs) have been accepted by most IXCs. The RBOC cards have enjoyed the advantage of consumer convenience. Consumers that use these cards often do so since the card number is their home or business telephone number and a four digit PIN which is easy to remember.
In 1990, AT&T began issuing the CIID cards and the 891 cards to its cardholders to protect its calling card revenue from losses to the OSPs and to compliment its introduction of the AT&T Universal Card -- a Visa or MasterCard and a calling card. Also in 1990, IXCs were required by the government to offer 800 access to their networks. This was not new to MCI or Sprint customers, but it was new to AT&T customers.
While AT&T provided an 800 number for access to its network, shortly thereafter it began an extensive advertising campaign with the theme "call 1-0-A-T-T." The message to AT&T customers was that if you didn't see AT&T on the payphone or you didn't hear AT&T with the bong tone, hang up and dial 1-0-A-T-T. This campaign was quite effective, and the term dial-around entered the telecom dictionary for the first time.
In July of 1993 MCI introduced 1-800-COLLECT. MCI advertised savings of up to 44 percent from typical collect calls. This led AT&T to introduce the 1-800-CALLATT product in January of 1994 (following an aborted campaign on 1-800-OPERATOR). The 1-800-CALLATT product was advertised as offering rates that were below those of MCI; it also extended the discounted calling from collect calls to calling card calls.
During this period Sprint changed direction from 800 access for its calling card and introduced calling cards with 10333 access. This permitted cardholders to retain their home telephone numbers but still restricted access to the Sprint network. The battle for culling cardholder market share among the three largest IXCs has intensified and continues to this day. Today there are "Call Me" cards, voice activated cards, personalized number cards, discount cards, and a variety of others offered by the major IXCs.
Smaller IXCs and OSPs, faced with the need for a product to compete with the proprietary cards of the major carriers, have in the last several years begun introducing value-added calling cards. Exemplary of these is a calling card offered by Frontier Corp. (formerly Allnet). The Frontier calling card is not only useful for placing calls while traveling or away from home, but it also adds the following list of value-added services for its cardholders:
Varieties of calling cards continue to be issued in significant numbers by IXCs, BOCs, independent telephone companies and OSPs. Prepaid calling cards are being issued by these same companies and by yet another host of competitors. Some recent research on the Internet reveals that, in addition to the more commonly known carriers, enterprising companies are advertising their calling card and prepaid card wares. These companies are hardly household names, but their ads are there nonetheless. Some examples include:
In another variation of the plastic product, some OSPs and IXCs have moved toward acceptance of bank and travel and entertainment (T&E) credit cards to expand the billing options available to their customers. This trend may be expected to continue as the IXCs begin competing with the RBOCs in the intraLATA and long distance businesses. It is possible that the RBOC card that today enjoys virtual universal acceptance may fall victim to the competitive wars that are about to occur if pending legislation that would allow the RBOCs into the long distance business is enacted into law.
One of the recent trends in the calling card market is the co-branding of cards to reduce the amount of plastic that consumers must carry and to enhance the value of the plastic that they do carry. The convergence of the credit card and the calling card has expanded in recent years.
Since SNET first introduced its co-branded telephone calling card and MasterCard in 1989, other companies have done the same or have offered variations of this theme (see Table 1).
Table 1. Co-Branded Telecom and Financial Cards
In addition to the above variations of co-branded calling and credit cards, there are others. MCI and Visa have teamed up to provide VisaPhone, which allows Visa cardholders to place calls on the MCI network and have the calls automatically billed to a Visa card. MCI has a similar service with MasterCard known as MasterPhone. Sprint offers similar products. And, American Express has Connect Plus, an arrangement similar to Visa and MasterPhone that is co-branded with major carriers.
Calling/credit cards are likely to play a continuing role in the communications habits of American consumers. While the form of the card may change over time, e.g. from magnetic stripe to smart card, the portability of an account to use in the billing of toll calls and the ability to access other emerging services while away from home or office will likely continue to be of interest to a significant portion of the mobile American consumer market.
John Gammino is president of John Richard Associates Inc., a Hazlet, N.J.-based telecommunications consulting firm. The firm provides consulting assistance in the areas of public and personal communications and CATV.
Calling cards have been and continue to be a favored billing instrument by Americans on the move. Most revenue generation from payphones continues to be from non-coin calling options such as calling card, collect and third party billed calls. Calling card calls are the predominant noncoin billing option for most markets. However, many IPPs don't ever see the majority of revenue from these calls. IPPs that route their non-coin calls to an OSP may be missing a significant opportunity to increase their revenue and margins from payphones. To do so requires the investment in available automated operator technology, but the investment may be worth it. Let's take an example.
Let's say a payphone generates $300 per month in total originated revenue. Of this amount, $120 is coin. The remaining $180 is from calling card, collect and third party billed calls. This money goes to the OSP, who returns a commission to the IPP of 25 percent. The IPP then has a phone generating $120 in coin and $45 in non-coin revenue for a total monthly revenue of $165. To many IPPs, the business appears to be predominantly a coin business, when often it is not.
By implementing store and forward technology with automated operator service, an IPP can process calling cards and collect calls itself, as opposed to the OSP handling the call. If the IPP provider handles the call itself (therefore keeping the retail revenue from the call), the margins from these types of calls can be 50 to 60 percent -- as opposed to the 25 percent commission received if an OSP handles the call. Of course, there are expenses an IPP provider incurs in handling its own calls (i.e. call delivery and billing and the capital investment in the technology). Essentially, it's a business decision for each IPP provider, but it does point to the need for IPPs to examine the way that they deploy their phones. The maximization of revenue and income that can be derived from the automated acceptance of plastic cards may present a meaningful opportunity to grow the IPP business, particularly if calling card and credit card calls will increase over time.
-- John R. Gammino
Source: The Nilson Report
Telecom Financial Financial Year
Company Partner Card Introduced
SNET People's MasterCard 1989
AT&T Universal Bank Visa/MasterCard 1990
Ameritech Household Bank Visa/MasterCard 1991
Sprint MBNA Visa/MasterCard 1992
GTE Associates MasterCard 1992
US WEST U.S. Bank Visa 1993
Pacific Bell Household Visa 1994
Nynex Chase Manhattan Visa 1994
Bell Atlantic First Omni Visa/MasterCard 1995
SWBT Mercantile Visa 1995
IPP Providers: Take Note