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How does Payment Allocation Work?

Payment allocation is the association of credit amounts, such as new payments and adjustments, against a customer's outstanding debts (e.g. unpaid bills / invoices). At minimum, the customer's billing account identifier must accompany the credit details to identify which debt is being paid (especially where customer have multiple billing accounts), though additional information such as a bill reference can also be supplied by the payment / credit source.



Credit Amounts

External credits may be received from a biller's customers through immediate interfaces such as the biller's web portal or call centre (i.e. payment by credit card), or batched interfaces received from a bank or financial exchange (e.g. BPAY, post office payments). Whilst the details supplied may be different, there will be a minimum set that allows the biller to determine where the payment came from (e.g. used for problem resolution and reversals), and where the credit is going (allocated to a specific customer's bill(s)).

Internal credits can be generated from within the biller, often through processing related to their billing system. For example, post-bill disputes, when resolved in a customer's favour, will generate a credit adjustment that can be allocated against the original bill (if still unpaid), or against another bill, to reduce the customer's outstanding debt.

Third Party Debts

Aside from biller's own charges, bills may contain the charges (and therefore partial debts) for outside third-party organisations (e.g. content providers, premium SMS), or roaming charges where the customer accessed another network (e.g. mobile calls, tollway journeys). The debt amount(s) in this case would have subtotals specific to each organisation (e.g. internal versus different external third parties), and may have subtotals specific to internal subclassifications (e.g. mobile versus fixed line access charges)

When bills are paid in full then both the biller's and any third party's debts are fully resolved. When only a partial payment is received from the customer, or a small adjustment is generated by the billing system (e.g. dispute resolution), the biller must decide how to allocate the credit against the separate internal and external debts.

The biller may decide to allocate any partial amounts preferentially to their own component of the outstanding debt, allocate against one (or more) of the third-party debt subtotals ahead of their own, or part pay their own in a pro-rata fashion. This will likely be based on the business agreements between the biller and the various external parties.

Payment Allocation Approaches

Three approaches available when allocating new payments and other credits against a customer's outstanding debts include:

  • Match by Bill Reference: Use a bill reference provided by the customer to identify a particular bill (one of many)
  • Exact Match: Check for a bill with the same outstanding amount as the new payment.
  • Oldest First: Find the oldest outstanding bill and allocate the new payment against it.

The bill provider can determine the priority order in which these allocation methods are employed, whether for new payments, partial payments and when credits such as adjustments are processed.

Match by Bill Reference

The customer provides, through the payment channel, the unique bill reference (often a number) that identifies one customer bill from another. By including this, the customer indicates their preference that the payment be allocated to the identified bill. The ability to provide such a bill reference will vary by payment channel. For example, when paying bills using the Australian bill payment service BPAY, a reference is required, and this is often the bill, customer or account reference that will be used when performing payment allocation.

When the bill reference is not present, or that bill has already been fully paid, the remaining payment amount will then be allocated against another bill based on the biller's preferred priorities.

Exact Match

The payment amount might match the original or currently outstanding debt for a specific bill. In the absence of the bill reference, this can be used as a signal of which bill the payment is intended to pay.

Oldest First

Customers with multiple outstanding bills can have any payments and credits allocated against the bill that been outstanding for the longest time. This has the benefit to the customer of paying off bills that are more likely to receive the harshest credit management actions, such as service disconnection and debt collection.

This is likely to be the default (lowest priority) choice used when all other approaches have been exhausted, or when no other approach fulfills their criteria.

Unallocated Credits

The biller must decide what their policy will be when the customer has no outstanding debt, but a credit arrives that matches one the allocation approaches. For example, does a dispute resolved in the customer's favour generate a credit against the original bill that must be allocated (generating a new unallocated credit of the same amount), or will the adjustment credit just sit on the customer's account as a credit for allocation against their next bill?

There are also times when the credit / payment amounts received will exceed the customer's current outstanding debt, generating an amount 'left over'. In these cases, the customer's balance will be in credit, and part of the process of loading future debt (new bills) will be to perform an initial allocation of the outstanding credit against that debt.

Usually the customer's new bill includes any outstanding credit amount in its 'amount due' calculations, such that when the new bill's debt is loaded and the credit has been allocated (using the approaches listed above), the now outstanding debt balance will match the 'amount due' sent out on the bill.

First published by

- 02 March 2014



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» How Does Payment Allocation Work? - Payment allocation is the association of credit amounts, such as new payments and adjustments, against a customer's outstanding debts (e.g. unpaid bills / invoices). There are different approaches for allocating credits against the customer's outstanding debt(s).

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Stephen Jones

Stephen Jones is a consultant who has focused specifically on Billing and related processes for over twenty years. Recent work has included relating a major telco's billing with inbound call centre logs for Call Centre Analytics.

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Other Publications by Stephen

I contributed an essay on testing design assumptions in the O'Reilly book 97 Things Every Software Architect Should Know. This book was written in an 'open source' style with more than four dozen authors. The original essays of the axioms / koans / advice can be viewed on the project's wiki.


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