What Is Telecom Arbitrage?
Telecom arbitrage is a strategy where telecommunications companies provide long-distance access numbers, attracting customers looking for lower costs when dialing internationally by routing calls through a third country. These companies gain profits through interconnect fees.
Telecom arbitrage is often considered to be a fraudulent activity that exploits differences in long-distance rates between countries at the expense of customers. Operators can combat telecom arbitrage by ensuring they only resell minutes to reputable companies and keep a close eye on their partnerships with third parties.
- Telecom arbitrage occurs when a telecommunications company routes international long-distance calls through a third country in order to capture lower settlement rates.
- This strategy can lower the cost of international cost for customers, but also opens up plenty of room for fraud that exploits customers.
- Telecom arbitrage fraudsters can also exploit FCC de-regulation on intercarrier payments for toll-free calling that can lead to unwanted robocalling.
Understanding Telecom Arbitrage
Arbitrage, in an economics and finance context, is the practice of capitalizing on price differences between two or more markets, with the end profit being the difference between the prices market to market. People who carry out arbitrage are called arbitrageurs.
Telecom arbitrage, also called "tromboning," is used by telecommunications companies who provide access numbers that enable their mobile or cellular phone customers to make international calls without paying long-distance charges by dialing certain access numbers.
The companies engaged in this arbitrage receive an interconnect fee from the mobile networks, and they use part or most of this fee to buy international calling routes at low prices. Say one country, B, has negotiated lower settlement rates with country C than with country A. In such a case, it is often less expensive for a telecom in country A to route international calls to country B by way of country C.
Telecom arbitrage works because the cost of long-distance calls has plunged to such an extent in recent years that it may be comparable to, or even lower than, the cost of domestic mobile-phone calls. While the margins on this arbitrage activity are very slim, telecom companies benefit because their mobile customers use up their monthly calling minutes in making these so-called free long-distance calls. Even though such customers do not pay long-distance charges, they indirectly pay for them through their monthly calling-plan charges.
A prominent telecom arbitrage route has been for calls between the U.S. and Australia to be routed first through Canada or New Zealand, respectively.
Reforming Telecom Arbitrage
Telecom arbitrage is rife with abuse. In fact, unethical telecom arbitrage costs U.S. consumers $60 to $80 million per year, according to a 2019 Federal Communications Commission (FCC) report. So much so that the FCC appears ready to clean house. In June 2018, the FCC began looking into quality assurance reforms in the system that oversees intercarrier payments for toll-free calling, which will include striking out any monetary incentive encouraging abusive calling practices such as "fraudulent or otherwise unnecessary robocalling to toll-free numbers.”
Telecom arbitrage abusers take advantage of FCC rules on intercarrier payments for toll-free calling: by chasing after the originating access fees, providers engage in unsavory practices such as robocalling, artificial increases in minute-by-minute fees as well as unnecessary and inordinate numbers of fees to the toll-free provider.
In 2020, the FCC issued a report and order partly moving from the current compensation system to a "bill-and-keep" system. A bill-and-keep system helps carriers keep revenue from subscribers by ensuring it cannot be siphoned off by others.
The FCC offers further insight into practices that fall under a telecom arbitrage scheme on their website. There they outline the practice they call traffic pumping or access stimulation.