Grace Period Billing Authorization Mechanism
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Solution Overview
Problem
Current payment systems face challenges in managing card-not-present transactions and recurring payments, particularly in situations where funds are not immediately available, leading to potential service disruptions or late payment fees.
Innovation Solution
Implementing a grace period billing system that allows issuers to authorize payments with an 'IOU' approval, delaying settlement until funds are available, thereby enabling merchants to receive payment after a predetermined period, even if funds are not present at the time of the initial authorization.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If immediate clearing and settlement is performed for payment transactions, then liquidity and cash flow are improved, but cardholders face service disruptions and late payment fees when funds are not immediately available
Solution Approach 1:
The system performs preliminary authorization to approve the transaction before actual clearing and settlement occurs. This allows the transaction to be validated and prepared in advance, with the understanding that settlement will occur later when funds become available, thus avoiding service disruptions while maintaining processing efficiency
Solution Approach 2:
The payment process is segmented into distinct phases: authorization phase (immediate approval), clearing phase (delayed), and settlement phase (when funds available). This segmentation allows each phase to operate independently, enabling immediate authorization while deferring actual fund transfer to when liquidity is available
2Adaptability or versatility
If grace period billing is implemented allowing delayed settlement, then cardholder flexibility and payment reliability are improved, but clearing and settlement time period increases
Solution Approach 1:
The system dynamically adjusts the settlement timing based on cardholder needs and fund availability. The grace period billing program allows flexible timing within the authorized window, adapting to varying liquidity conditions while maintaining a defined maximum settlement period to prevent indefinite delays
3Reliability
If grace period billing program is established, then merchant payment guarantee and cardholder payment management are improved, but payment network complexity increases
Solution Approach 1:
The payment network operator acts as an intermediary between merchants, issuers, and cardholders in the grace period billing program. This intermediary manages the complex coordination of delayed settlements, credit risk assessment, and fund transfers, shielding participants from the underlying system complexity while ensuring reliable payment guarantees
Data Source
AI summary
An authorization request for a payment transaction is obtained, from a given one of a plurality of billers, over a payment network having a standard clearing and settlement time period. Via the payment network, a special IOU approval authorization request response to the authorization request for the payment transaction is passed, indicating that the given one of the plurality of billers will be paid in connection with the payment transaction after expiration of a grace period from a time of the authorization request, regardless of whether funds are available for an account associated with the payment transaction. The grace period is longer than the standard clearing and settlement time period. The payment transaction is not settled until expiration of the grace period.