Deferred Settlement System for Merchant Fee Control

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Solution Overview

Problem

Merchants have limited control over and no means to reduce the discount rate fee associated with credit card transactions, as they bear the risk of consumer default, leading to reduced revenue.

Innovation Solution

Implementing a deferred settlement system that allows merchants and acquirers to choose when to settle transactions, thereby assuming part of the consumer default risk in exchange for lower transaction fees, with the option to delay settlement for a longer period than traditional methods.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Loss of time

If merchants accept prompt settlement within 2 days, then they receive payment quickly, but they must pay a higher discount rate fee

Engineering Contradiction:

Improvesettlement timeVSAvoiddiscount rate fee

Core Design Contradiction:

Loss of timeVSLoss of energy

Solution Approach 1:

The patent applies dynamics by making the settlement timing flexible and adjustable rather than fixed. Merchants can dynamically choose between prompt settlement (2 days) and deferred settlement (7-30 days) based on their cash flow needs and risk tolerance. The system dynamically adjusts the discount rate fee based on the selected settlement timing, allowing merchants to optimize between time loss and fee payment.

Inventive Principle:

Principle #15Dynamics

2Loss of energy

If merchants pay lower transaction fees by deferring settlement, then they assume more consumer default risk, but they gain control over fees

Engineering Contradiction:

Improvetransaction feeVSAvoidconsumer default risk

Core Design Contradiction:

Loss of energyVSReliability

Solution Approach 1:

The patent applies parameter changes by adjusting the settlement timing parameter (from 2 days to 7-30 days) to change the risk profile and corresponding fee structure. By changing the time parameter, the system allows merchants to select different risk levels and pay corresponding discounted fees. The issuer also changes the fee parameter based on the deferred settlement agreement, reducing the discount rate in exchange for the merchant assuming additional risk.

Inventive Principle:

Principle #35Parameter changes

3Loss of time

If issuers bear the majority of consumer default risk, then they pay merchants promptly, but they cannot reduce the discount rate fee

Engineering Contradiction:

Improvepayment timingVSAvoiddiscount rate fee

Core Design Contradiction:

Loss of timeVSLoss of energy

Solution Approach 1:

The patent applies inversion by reversing the traditional risk-bearing arrangement. Instead of the issuer bearing all risk and paying prompt settlement, the system inverts the arrangement so that merchants bearing more risk (by deferring settlement) receive lower fees. The issuer transfers portions of the risk back to merchants in exchange for reduced discount rate fees, fundamentally inverting the risk-fee relationship.

Inventive Principle:

Principle #13The other way round (Inversion)

Data Source

PatentUS8725642B2Delayed settlement transactions

Publication Date: 2014.05.13 VISA INTERNATIONAL SERVICE ASSOCIATION

AI summary

Methods for deferring settlement of a transaction are disclosed. A server computer receives an authorization request message for a transaction. The server computer then receives an authorization response message for the transaction. The server computer then receives a deferred settlement indicator for the transaction.