Speakers’ Corner: Fraud still biggest threat to operator revenues, 20 years after emergence

Andy Gent, CEO of fraud intelligence company Revector, highlights the risks to mobile operators of ignoring various frauds taking place on their networks

Mobile service providers generate revenues in two ways.

One is through subscribers that pay the company to access the networks for voice, text and data. The second – termination revenue – involves getting paid to transport calls across the world from one person to another.

Telecommunications companies establish relationships with others based on predictable calling patterns. For example, BT may know that it needs one million minutes of calls to South Africa per month, so establishes a relationship with a partner in the country to provide that amount. The issue comes when the unexpected happens, such as an earthquake in Cape Town, leading to UK residents with relatives in the city suddenly demanding more minutes and operators being left short.

Termination minutes are traded like other commodities, with operators going into the open market to buy minutes. These can be associated with ‘white’ routes – comprising premium minutes provided by legitimate telecommunications companies – and ‘grey’ routes, which are provided by third parties or via fraudulent means. The natural pressure on cost means that some telecommunications companies end up buying grey minutes.

SIM box fraud

SIM box fraud occurs when there is a difference between the cost of routing and terminating a call in a country. Operators often provide calls on the same network for free, while the cost of terminating a call in the same country might be $0.05 (£0.04). If someone can procure SIM cards with the free call promotion and load these into a SIM box – a device housing hundreds of SIM cards in racks – the third party can offer to terminate calls. The revenue generated is pure profit after the cards and boxes have been purchased.

While this sounds complicated, it can be exceptionally lucrative. One single SIM card can generate $3,000 per month, and hundreds if not thousands of cards are in every SIM box. Service providers can quickly lose revenue to SIM boxes: in some cases, they have lost 90 per cent of termination revenues.

Is it illegal? 

If this practice sounds entrepreneurial rather than illegal, it is probably because it seems like a victimless crime. However, mobile network operators have paid millions if not billions to generate termination revenues. A reduction in this revenue means less investment into networks or customer service. Often, these SIM box frauds are run by criminal gangs using the process to launder money or finance organised crime.

Other telecoms fraud

A newer threat to operators’ termination revenues comes from over-the-top (OTT) service providers, which also compete with service providers for a share of the voice and messaging market.

While most telecoms companies see voice-over-IP as fair competition, in recent years several new OTT service providers have grown extremely quickly. WhatsApp, for example, was incorporated in 2009 and acquired by Facebook just five years later for almost $20 billion, encouraging several copycat- type services to develop.

Recently, some OTT players are looking to termination revenue to monetise their own business models. These operators have been offering competitive termination rates by hijacking a traditional call made from one telephone number to another and terminating it within an OTT app. A user dials a number, but the recipient receives that call as a VoIP call in the messaging app.

Because the OTT players have zero cost for terminating the call, they can provide very low termination rates. For the OTT app, another benefit is that the recipient of the call believes the caller has used the app to call them, thus making them more likely to use this method of communication in the future – and less likely to dial a number directly. For the OTT players, call termination acts as a marketing tool and a revenue stream.

In a survey of more than 150 operators globally, telecommunications companies identified an average 20 per cent reduction in termination revenues directly attributable to OTT companies. A small number of operators experienced 60 per cent revenue reduction in termination.

Combatting fraud

The increasing global reliance on always-on internet services demands continuous investment in infrastructure. Every new mobile handset leads to double-digit increases in data consumption, which leads to increased pressure on networks to invest. If revenues are limited by fraud, there is less available to fulfil this need.

Why do networks not do more to combat fraud? Most mobile operators are large but still relatively young companies – typically built around customer acquisition.

Networks have been less concerned about losing revenue to fraud than grabbing new subscribers. This has led to a mindset where whatever the questions, the answer is always more marketing. Ironically, marketing promotions often lead to more fraud. As networks continue to offer ‘unlimited calls’ for a fixed fee, so the fraudster can deploy more SIM boxes.

There have been examples of networks where proof-of-concepts have demonstrated a guaranteed return on investment of 10 to 20 times, but a fraud manager has still not been able to convince the network to spend a small amount to save a larger sum.

Opportunity for the future

As mobile networks mature, so the issues around combatting fraud become more a subject of concern.

Some 20 years after these frauds were first identified, operators are still losing revenues to criminals. Addressing this remains a priority – not just to ensure networks receive the revenues they should, but to ensure they are obliged to build and maintain the services we will all expect and rely on in the future.

Andy Gent is CEO of fraud intelligence company Revector