<strong>Device Financing: Bridging the 5G Affordability Gap</strong>

With faster speeds, low latency and broadly increased capacity, 5G is set to revolutionize the way people live and work. In mature markets, customers are eager to upgrade to 5G handsets but increasing prices of smartphones make it cost prohibitive for many. Device or smartphone financing may be a promising alternative for people on a tight budget.

5G Smartphones are Ready to Take Off 

5G subscriptions grew by 70 million during the first quarter to around 620 million, and that number is expected to surpass 1 billion by the end of this year <1>. Naturally, 5G smartphone sales are expected to increase.

According to a report by market analytics firm Counterpoint Research, global sales of 5G smartphones surpassed those of 4G handsets for the first time in January. Over 650 5G smartphones have been launched, accounting for 50 percent of all 5G devices by form factor. 

Affording a 5G Smartphone

People today are increasingly connected to the digital world while on the go via smartphones. Continuing the trend, 5G devices with improved capabilities will enable people with new experiences such as immersive gaming and improved online retail shopping.

Although the average selling price of 5G smartphones will decline over time, 5G devices will still be more expensive than non-5G handsets. One potential reason is the fact that 5G phones can be costlier to manufacture than 4G models, by up to 20-30 percent.

Companies charge intellectual property (IP) royalties to smartphone makers using its 5G patented tech. The IP cost adds to the wholesale price of a 5G smartphone. More expensive hardware components, additional IP charges, and recent geopolitical factors ensure consumer affordability becomes a challenge.

Financing a Smartphone

Purchasing a 5G handset outright can be a challenge for many people. Financing a handset may seem like the better option and it is available through retailers, cell phone OEMs, telecom carriers, and buy now pay later (BNPL) platforms.

Smartphone or device financing is different from smartphone leasing. Device leasing allows customers to use smartphones for a set period of time, while financing enables them to own the phone at the end of the payment term.

Financing terms vary from where customers are purchasing and how much they are paying for it. For instance, if a customer chooses to obtain a handset from a telecom carrier, the financing option allows customers to receive a handset by paying it off in monthly installments.

The handset cost is split from the cost of service. After the entire amount is paid at the end of the contract, the customer now has ownership of the device and from then on, pays only for the monthly service charge.

Benefits of Device Financing

The average selling price of 5G handsets can be prohibitive for most buyers today. The motivation behind device financing is to create visibility and affordability for customers. 

• No upfront fees. Device financing allows customers to get the latest smartphone without paying any upfront fees. It makes it easier to pay for smartphones over time rather than paying upfront.
• More frequent device upgrades. As the smartphone cost is unbundled from the contract, customers can upgrade frequently. Removing upfront costs and spreading the cost of the handset across 24 or 48 months encourage customers to trade up to more expensive devices.
• Clarity of tariffs. By breaking the contract into separate payments for the smartphone and the service, customers can compare and choose services offered by different operators based on cost and value. 
• For telecom carriers, smartphones occupy a significant share of a subscriber’s telecom wallet. Reducing the cost burden on customers helps increase the customer lifetime value. 

Risks of Device Financing

• For a telecom carrier, cash flow would be the key problem in smartphone financing. They need to pay OEMs for their phone within 30–90 days, while customer payment plans span 24 months. The high average selling price of 5G smartphones applies significant pressure on the company’s balance sheet.
• Consumers may fail to make timely payments according to the initial agreement. Companies may face more risk of bad debt, by customers defaulting on payments, over the course of the contract.
• Customers that are new to credit or have a poor credit score, but are willing to purchase a handset on finance, may not qualify for smartphone financing schemes. This stops sellers from attracting a new, young population to the financing option.

Wrapping Up

All stakeholders of the telecom ecosystem can reap major benefits. For customers, access to the latest 5G smartphones becomes more affordable. Telecom carriers can replace the subsidy model with an efficient alternative. OEMs and retailers can also accelerate sales of new devices with device financing. However, companies may need a control mechanism that protects their investment against payment default and theft. 

Authored By- Sriram Kakarala, Vice President of Products at ProMobi Technologies