There is more evidence that prepaid payment methods are quickly becoming mainstream. In the November 2009 Retske Report, we reported on how prepaid lines of business in the two biggest credit card companies, Visa and MasterCard, had literally saved the bottom line of both companies. In both cases, explosive growth in the sale and use of prepaid debit cards snatched victory from the jaws of financial defeat.

Now, it has happened again. This time, with one of the biggest mobile providers in the U.S., T-Mobile USA. On February 25, Deutsche Telekom’s USA subsidiary announced its 2009 final results. Its net new customer base increased by 371,000 in the fourth quarter. Almost buried in the headline was the fact that its net contract customers declined 117,000. That’s right, it lost contract customers, and lots of them. But, just like the Cavalry, prepaid net customer additions went up a whopping 488,000 in the same quarter, for a net gain of 371,000 in the total T-Mobile USA customer base. Total revenues for the company were up slightly to $5.41 billion in the fourth quarter.

Remember that the number is NET new customers, and with a 6.8% churn rate in its 7 million prepaid customer base, it lost somewhere over 400,000 customers, so the total new customers would have been nearly a million in order to net half a million. It is likely that some of the new prepaid customers came from T-Mobile’s contract customer base, but not nearly all of can be credited to customers changing rate plans, since the total customer gain was positive.

One thing is clear, without prepaid, T-Mobile USA would have suffered mightily. Without the phenomenal gain in prepaid customers, revenues would probably have plummeted.

Contract customer churn increased to 2.5%, while prepaid churn, historically higher, declined from 7.4% to 6.8%. By definition, prepaid churn will always be higher because of the lack of a contract, and termination fees. T-Mobile USA credits the increase in prepaid performance, in part, to its Even More Plus hybrid rate plans.

Let’s take a look at Even More Plus to see how this offering helped T-Mobile to gain almost a million new customers in one quarter.

Even More Plus comes in three flavors, with varying levels of data and text. Individual plan rates, which are non-contractual, go from $40 per month for an unlimited voice service plan to $80 for an unlimited voice plan with unlimited email, web and text. By contrast, the Even More rates, which require a 2 year contract, range from the same $40 a month to $60 a month for unlimited voice, web and data.

The biggest factor comes down to the handset subsidy and the contractual requirement. For example, T-Mobile will give you a free BlackBerry Pearl smartphone with a contractual plan, but will charge you $300 for the same phone on a non-contractual plan. No surprise, since the principle of TINSTAAFP applies. There Is No Such Thing As A Free Phone. You get a free phone, you have to sign up for 2 years.  If you do the math, a non-contractual BlackBerry will cost you $20 a month more for 2 years or $240 more. So, for $60 ($300 for the phone - $240 difference in rates), you can have the freedom and flexibility associated with a non-contractual plan. With lower end phones, the savings are less, and you might even pay more for a “free” phone on a contractual plan.

This is not much different from other facilities based carriers, Mobile Network Operators. The gap between contractual and prepaid (technically, hybrid) plans has narrowed sharply over the years because of competition, lowering the incentive for consumers to commit to contracts.

What this shows, is that given an even choice, consumers are increasingly deserting contract based services. We see some of this in the Visa and MasterCard results, and, I suspect we will see even more of it in the future as more service providers are driven by market forces to bring their contractual and non-contractual rates to parity. Part of the trend may be the economy. Part may be attributed to different values and needs in different groups, like the younger crowd. And, part of it may be the desire to have more control over their choices by consumers.

Regardless of the reasons, it is increasingly clear that anyone with a service that involves recurring fees should explore the prepaid, non-contractual options that consumers are finding increasingly hard to resist.