Forums: Discussions for entrepreneurs and small business.

I had a discussion with a buddy of mine regarding CSE in Florida. The Dept. of Revenue charges the payee $4-11 fee for the privilege of dispersing a check. Now in my state “Florida Department of Revenue - Child Support Enforcement; Enforces child support law on behalf of about 975000 children, collecting $1.16 billion in FY06”

So let’s break this down:

·         975,000 orders

·         Avg. $7.50/check=$7,312,500 per month

·         $87,750,000 to put a check in the mail

·         Assume 20% admin cost and it’s a nice racket

  A part of my business is electronic payments i.e. debit/credit cards. In my industry the debit card has evolved into a payment card with the selling point being that it lowers the admin cost to employers. As I see it there are a couple of opportunities here:

·         Privatizing the payment system

·         Structured Settlements

The first item is purely a logistics issue and let’s says the vendor charges a lesser fee based on volume. I know that a private corp. can get the job done at 50% the cost now.

The second is the real cherry here: If you don’t know what structured settlements are -This is a settlement where the injured party may receive some of the money owed up front and the remaining is paid in installments, (i.e. annually, semiannually, quarterly).

The avg. child support judgment is roughly $600/month. Multiply this by 15 years ($108,000 over 15 years) The settlement company offers the recipient an $86,400 (80%) cash out. That’s a $21,600 profit for the company. Now if this company takes those proceeds and invest them they can potentially net a tidy sum after all is said and done.

The USP (Unique Selling Proposition) could be:

·         Guaranteed income

·         LTV

·         Lump sum payments etc.

·         Mediations

·         Bonding Services (never be arrested for arrearage)

The Biz op could be:

Agent structure with commissions based on building a network of independent Agents.

·         Commission Structure:

·         $25 fee/applicant

·         1 full month of CS Payment and 20% of 1 month for term

I see a huge opportunity here or am I Q-razy?

Hmm. This sounds like a great idea but it also sounds a bit dirty. Of course not paying child support is *really* dirty. I`m surprised the hedge funds aren`t in this business already. Basically this is the same as buying/selling derivatives. The downside risk in this case is non-payment ... which is a huge risk with respect to child support. You`d need a seriously qualified risk management professional to advise you on managing downside.

That’s a $21,600 profit...

Let`s not forget that this profit is over 15 years or $1440/annum. Not as attractive unless the skew was very shallow indeed. The risk each year is $5700. The question here is cashflow, and it seems like a very risky proposition indeed. Securitizing child support cashflow is really dicey in my opinion. The business takes 100% of the risk for 20% reward. More commonly, especially in financial services, the business takes 20% and the client takes 100% of the risk.

Model-wise, child support is structured to provide monthly cashflow to the parent of the child. Lump sum payouts could be misspent. This already happens to monthly payments and it`s the child who suffers as a result.

It might be better to snip the lump sum apart into monthly payments. This also reduces your downside because you`re only liable for cash on a monthly basis. Instead of taking an $86,000 risk you spread your risk out over 15 years, into 180 risk units. Higher risk granularity means that a great many things have to go wrong before you`re in financial trouble. The statistical chances of something going wrong are much more manageable if you have 180 risk units x 10,000 clients [1.8 million risk units] than if you have 10,000 risk units [one for each client].

[ Also. Who would supply the initial liquidity for the buyouts? This idea is very easy to duplicate. A bank or fund could decide to get into this business very quickly and then you`d have a price war. ]

p.s. Novel idea. A rare thing these days.