Selling Structured Settlement Payments: Part 2 - Understanding the Present Value of Future Payments

As called for in a structured settlement, individuals are designated to receive future payments. The payments are issued via an annuity purchased from a large, relatively safe insurance company. Recipients of structured settlement payments sometimes decide that there is an important need to receive settlement funds before the scheduled payment dates. This can be done pursuant to an assignment process that is regulated by the law. At some point in that process, the seller must agree to a price.

What then is a reasonable price for money scheduled to be paid in the future? How does the "market" determine that price? An informed seller can feel protected if they understand two things: 1) The method used to determine the Present Value of a future payment, and 2) The absolute need to confirm that the competitive marketplace has played a role in determining that Present Value.

The Present Value is based on a mathematical discounting process taking into account the amount of time between now and when future money is due. A payment is therefore "discounted" from its future full value back to its Present Value using a discount rate plus the passage of time. A financial calculator, easily found online, will determine the Present Value of any future dollar amount. The calculation requires input of the future value (the amount(s) scheduled to be paid under the settlement), the date that you are scheduled to receive the payment(s) being sold, and the discount rate (interest rate) being charged. Anyone with a mortgage payment, or a car payment, already understands the concept (whether they know it or not). The Present Value of a series of car payments was the price paid for the car (minus any down payment). It is a given that the total of the car payments is more than the amount financed, due to an interest charge. In the same way, the future settlement/annuity payments will be more than a seller receives today due to the discount/interest charge used by the purchaser to create the Present Value. The Present Value is the price received for the future payments.

It is very important for the seller to make sure that the market, made up of all interested purchasers, provide the lowest possible interest charge. Competition takes care of that, as it does for the sale of anything. Summary: Sellers of structured settlement payments can feel comfortable that the sales process is regulated by the law, but the individual seller is fully responsible for forcing the market to work in his or her favor.

Shannon Harvey writes for Annuity Transfers a buyer of structured settlement payments. If you are looking to sell your structured annuity payments visit Annuity Transfers.

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What Is Likely to Occur in the Payments and Online Billing Landscape in the Next Few Years?

In broad terms, the payments landscape (which is still very paper or physical form-based in so many ways) will continue to switch inexorably to an online environment at many levels with "barcode type" paper to replace physical monetary exchange products like cheques and cash in the next few years and possibly even Card (debit, credit and pre-paid) in the more distant future. The market will increasingly use smart phone and PC tablet as a channel, although the infrastructure required to support this will take as long as 20 years to make the full transition.

Online person-to-person or P2P payments will increase using mobile devices or social network sites as the initiation point. In the early days of this transition, bank account details will need to be known but accessing and using cleared funds (as the way customers want to interact will each) will see more new players emerging outside of the traditional banking community.

While banks are competing with each other for market share, new players entirely are likely to be able to capture payment market share away from their base, by better satisfying the needs of market. PayPal, Google & Apple are good examples of this or it may be entirely new companies that are yet to become well-known.

The cultural shift to perform everyday functions on-line is still in its infancy. While on-line shopping is growing exponentially, other behaviour will move more towards online. For example, full digital bill presentment and payment services.

So, if that's the general scene, let's look at what might happen under a few specific headings

TIMELINESS & CHOICE

Customers want to choose when they pay, day or night, 24/7, 365 days of the year and whether to pay 'just in time' or in real time. Customers want very wide payment type options and the ability to choose which option best suits each payment activity.

In many cases, recipients of funds prefer real-time or same-day settlement. Surety of settlement in real time will be critical in most cases.

ACCESSIBILITY

Customers want to access the same payment options regardless of the channel by which they pay. For example, this may be the same payment choice regardless of whether they are in a store, at an on-line store or paying a bill.

Merchants will increasingly prefer to receive funds from the same payment options, regardless of channel, to reduce vendor management and improve internal efficiencies.

EASE OF USE

Customer like payment types that are easy to use and one they understand and trust. Mobile, PC tablet & social network usage is making the introduction of new payment processes easier to manage and educate the market, but present other challenges for the payment industry as a whole.

EASE OF INTEGRATION WITH OTHER PROCESSES

Online payments will grow steadily and will ultimately dominate the payment landscape. However, capability and capacity to integrate with internal computer systems will be a barrier that will need to be overcome. Seamless integration with Point-of-Sale systems, on-line store, ERP, inventory systems and billing engines will be a critical factor.

Cloud-based technology will assist in keeping capital outlay lower and at manageable levels while providing high speed access to the payment instruments and associated internal systems.

RELIABILITY

The new payment instruments and channels that arise will need to be ever more reliable. Traditional payment providers can still play a huge role in ensuring that high quality standards and suitable interoperability is maintained ensure the instrument can be trusted.

Convenience can sometimes trump reliability, but both having both is likely to be a winning combination.

PRICING

New payment instruments will have to be cost effective is all cases and this will start to happen slowly.

What is blurring the price aspect is merchants will try to demand low transactional costs even when real demonstrable value is being added. For example, instant bank transfer provides significantly more benefits to both a consumer and a merchant and yet the expectation would be that this should be priced the same as, or even lower than, the transactional cost to write a paper-based cheque.

Another example is that presenting an electronic invoice with a wide range of payment options would be significantly more cost effective than a biller managing their own bill collection, even though individual transaction pricing by payment type may be more expensive in that particular silo.

SECURITY AND ROBUSTNESS

Similar to the reliability heading, secure and robust payment instruments will be increasingly essential, although convenience and ease-of-use are considerations that will often dilute how secure and robust the new instrument has to be in practice.

INTEROPERABILITY

All online digital Payment systems will have a much higher degree of interoperability with other systems than they do now. This will apply to the movement of money (where necessary) and more particularly to data transmission. The intelligent design of this data transition process (nationally and internationally) will be done by at least one large player outside current financial services sector or by a new market entrant.

RISK MANAGEMENT

Much richer risk management tools will be available and these will have sophisticated algorithms that track all payment patterns and provide risk attenuation or control options at every level. This is likely to be a new software-based market entrant.

Summary

No-one has a "crystal-ball" to predict the future, but the online payments space is changing rapidly around us. It will be interesting to see whether, we are still heading in the general direction that this article suggests in 12 months time and whether some of the forecasts are starting to come true or not.

This article was written by Dr Jon Warner of Payswyft (at http://www.payswyft.com/ ). Jon has extensive senior executive experience and has led organizations in a variety of industries through significant transitions to achieve bottom-line results. He is an expert in developing and implementing strategies in operations, marketing, sales, and corporate turnarounds. Jon is currently CEO of PaySwyft in the UK (an innovative on-line billing and payment business) and Chairman of WCOD (a management consulting and publishing business). He can be reached at jon.warner@payswyft.com.

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Selling Structured Settlement Payments: Part 3 - Finding Value in the Legal Process

Structured settlement payments are received from an annuity that was created as part of a legal compromise. A plaintiff, having filed a lawsuit, and a defendant, responding to the claim, ultimately agree to settle the case and avoid further litigation. The settlement releases the defendant from future liability, and the release is exchanged for monetary compensation. An annuity is purchased from an insurance company and payments are made to the plaintiff, who is thereafter referred to as the "payee". Structured settlement payees, originally satisfied with the terms of the settlement, sometimes decide that waiting for future annuity payments is not in their best interest. The payee makes a decision to sell the rights to receive future payments. In legal terms, a structured settlement payee decides to "transfer" future payments at a contractually agreed upon price. In order to do so effectively, sellers must understand what is required legally when selling structured settlement payments and how the legal framework for selling payments actually protects them.

Forty-seven states have specific laws that regulate the sale of structured settlement payment rights. The laws vary slightly from state to state, but all require that a court approve the transaction. The relevant state law requires that a particular court and a particular judge determine that the reason for selling, and the terms of the sale, collectively represent the best interests of the seller.

Sellers should realize exactly what that means to the process and the deal. A seller of structured settlement payments should always request nothing less than what the market will bear. The seller may remind the purchaser that the better the terms of the deal, the more likely the judge is to approve the deal. This does not mean that these types of "transfers" exist outside the bounds of normal supply and demand. All purchasers are restricted by the underlying transaction costs, and the risk inherent in purchasing a future payment. It is understood that a purchaser pays for something today, but must wait until some future date to receive payment. Unlike the purchase of a car or a house, this transaction is scrutinized by a third-party, and is not approved in court unless it represents a real "win-win" situation. Purchasers cannot assume that courts will approve all structured settlement transactions, just as sellers should not assume that all offers to purchase payments are constrained by the legal process.

No one involved in the structured settlement transfer process should assume anything. Sellers use the requirement for court approval to their advantage, while accepting the reality that no sale is possible without a fair price. The market would not exist and will not exist in the future unless the purchaser is willing to take on some level of risk — but all risk comes at some cost.

Shannon Harvey writes for Annuity Transfers a buyer of structured settlement payments. If you are looking to sell your structured annuity payments visit Annuity Transfers.

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