I bet most of you now have a smartphone whether android or apple, I also guess that most of you buy your phones not unlocked but on a service under a two or three year contract. It is your choice whether to purchase your phone unlocked, but most of us don’t as it is too burdensome to pay in a lump sum. Mobile carriers you can name, SK Telecom, KT, LG U+, Vodaphone or T-Mobile and many other numerous communication service providers all suggest you to conclude an agreement with them. Yes, obviously it does provide them profits as customers are to abide by the contract for expressed periods but, Mobile carriers consider mobile phone installments’ as a locked money as they cannot make a use of it. But this kind of phenomenon seem to be changed as financial intermediaries used their techniques to use installments as cash (ready money) that can be invested immediately. Let’s find out more carefully.
The intermediaries are using techniques that issue ABS based on cellular phones’ installments. You might be wondering what an ABS is. You can have a reference on my former articles on ABS. But here, let me explain briefly what an ABS is, an ABS is an abbreviation of Asset-Backed Securities. It is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Usually, intermediaries pay costs to cellphone manufacturers like Apple and Samsung and sells phones to customers on 2 to 3 year basis which is why their funds are tied up. But if they gather up installment debentures (claims that can accept installments) and set it up as collaterals (underlying assets) to sell as ABSs mentioned above, intermediaries can encash the installments that are to be received under 2 to 3 year basis at once. Also investors that purchase these debentures are provided with interests with installments members pay monthly.
According to Financial Supervisory Services (FSS), debentures based on cellphones’ installments have increased by 87.2% since last year and this kind of fast tendency seems to be continued this year. What do you think is the reason why this kind of ABS market is growing so rapidly? The reason is that the market is set as a virtuous cycle which allows everyone in chain gets interests. Now, do you get an idea how the installment fees you pay are used ? I hope this articlesolved your curiosity.
By Hyouk-hee Kwon