Analysts: As equipment installment plans boom, carriers likely to focus on tighter credit standards

As U.S. wireless customers continue to adopt equipment installment plans (EIPs) to finance their handset purchases, wireless carriers are likely going to focus more on the credit quality of their customers, according to a new report from financial analysts at Wells Fargo.

In a research note, Wells Fargo analysts Jennfier Fritzsche, Eric Luebchow and Caleb Stein note that EIPs are "clearly here to stay" and that their popularity boomed to their highest levels in the fourth quarter.

AT&T Mobility (NYSE: T) said 58 percent of its smartphone activations were on its Next EIP. Sprint (NYSE: S) reported a comparable figure of 46 percent (thought that also includes device leasing). Verizon Wireless (NYSE: VZ) said around 25 percent of all of its phone activations were completed through its Edge program, up from 12 percent in the third quarter. Verizon Communications CFO Fran Shammo said this week at an investor conference that the carrier expects that figure to reach 35 percent in the first quarter--and he said that might continue to rise throughout 2015. T-Mobile US' (NYSE:TMUS) Simple Choice plans are all on the EIP model.

Equipment installment plans let customers pay off their devices in installments, in many cases without paying anything at the time of purchase. That eliminates device subsidy costs for carriers as consumers pay back the cost of their phones in installments. According to Wells Fargo, in the fourth quarter EIP receivables--the amount of money customers owe through EIP plans--grew 42 percent at AT&T, 20 percent at Sprint, 18 percent at T-Mobile and 15 percent at Verizon.

"While these plans are accretive to margins, the promotional environment and strong upgrade cycle seen in the quarter caused greater pressure on margins than hoped for three of the four carriers," they analysts noted, with the exception being T-Mobile.

"With the explosion in demand for installment plans, carriers have sharpened their focus on the credit quality of EIP subscribers," the analysts wrote, noting that Sprint CEO Marcelo Claure has spoken about Sprint being "too generous" with credit when he took the helm in August 2014. He has since tightened credit standards for EIP and leasing customers.

At the end of 2014, according to Wells Fargo, only 22 percent of Sprint's EIP receivables were classified as subprime, down from 29 percent at the end of the third quarter and 34 percent as of March 2014.

Wells Fargo said T-Mobile currently has 46 percent of its EIP receivables classified as subprime but notes that T-Mobile has tried to shift the focus away from external credit scores in assessing a customer. Under a T-Mobile plan called "Smartphone Equality," which it launched at the end of January, if an existing customer has made 12 consecutive, on-time monthly payments they automatically qualify for the carrier's best device pricing and financing, including $0 down on the newest smartphones with no interest and no credit check. The plan applies to every T-Mobile prepaid or postpaid customer with a voice plan, regardless of their plan--or their credit history. T-Mobile has argued that sub-prime customers who pay on time for 12 months straight perform better than new prime-credit customers who come into T-Mobile.

Verizon and AT&T do not provide as much disclosure on the credit quality of their customers, Wells Fargo notes, "but it seems likely that some of the 'involuntary churn' Sprint experienced when it tightened credit standards benefited TMUS's customer growth."

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