Dealer Fraud – More to the commission than meets the eye.

Dealer fraud is not as big and bad as subscription fraud. Nevertheless the industry loses a lot of money through this not-too-difficult to perpetrate phenomenon.  During my anecdotal research I was surprised and mildly shocked to see how widespread the phenomenon was but even more shocking was that none in the supply chain seem to care too much. Well, as one person I spoke to put it “the operators themselves are to be blamed. They pressure us to meet their numbers each month. And we do what we can to help them in whatever way we can and it’s what everybody does.” I couldn’t verify this claim as it was virtuously one sided but as the saying goes ‘there is no smoke without fire’. I write this with the Indian market in context but I doubt it varies much for other markets.

Now let’s look at a modest scenario to get the gist of how this works. Normally for every new connection sold, the seller gets a commission. It’s that simple. There are various slabs of commissions paid depending on a variety of variables such as tariff, handset, daily, weekly and monthly targets, average top ups etc. The seller collects the mandatory proof of IDs (mandatory in India) from the subscriber and passes it on to the operator who in turn ensures that they are valid in the eye of the regulator. All this is done in a time-boxed manner. Any process violation or invalidation of proof will result in loss of service to the consumer using the SIM and the commissions clawed back.

Now, assume a dealer buys a pre-paid SIMs from the operator. The face value of the SIM is $20. i.e. there is $20 worth of talk time at a tariff set by the operator. The dealer buys it for say $18 per SIM. He adds a basic re-charge for another $20 taking his total cost per SIM to $38. The dealer now sells the SIMs at a discount (say $20). Well, most of the target customers for a quick sale are young college grads; cash starved grads would do anything to get a virtually free SIM with pre-paid talk time.  It’s a no-brainer as there’s nothing amiss in the eye of the subscriber.

The dealer now gets a reward for the new connection from the operator (let’s say he gets $50 per connection. The high reward in comparison to the cost of the SIM is based on the premise that the future share of income from the new subscribers would far outweigh the commissions). The dealer now has made a total of $68 for an initial investment of $38 for each SIM.  Whichever way you look at it, the dealer makes a decent profit with little or no effort. But, this doesn’t end here. In return for the new connection, the dealer also gets a number of valid proofs from his new subscribers.

The dealer exploits the system further by meeting his monthly targets by making fake activations based on the proofs obtained earlier.  If you carefully look at this exploit, the dealer gets a commission even before a sale is made – how cool is that! There are also opportunities to sell proof of IDs to unscrupulous middle men who then sell it on to other dealers who can carry on the racket. The claw back period, if any, imposed by the operator based on simple revenue assurance checks, is also swiftly circumvented by providing recharges for free SIMs to the same subscribers or by extending favours to insiders.

Dealer relationships might look hunky-dory with new customer additions keeping the operator happy and the management delighted. However, there is more to the commission than meets the eye; probed further, I am sure, some interesting patterns will emerge.

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