Cancellation and refund policy in LLD - System Design Exercise

Design: Cancellation and Refund Policy System

In scope: cancellation request handling, refund calculation, refund processing, notifications, policy management. Out of scope: payment gateway implementation, user authentication system.

Functional Requirements

FR1: Allow users to request cancellation of their orders or bookings.

FR2: Support different cancellation policies based on product or service type.

FR3: Calculate refund amount based on policy rules and time of cancellation.

FR4: Process refunds through payment gateways securely.

FR5: Notify users about cancellation status and refund details.

FR6: Maintain audit logs of cancellation and refund transactions.

FR7: Allow administrators to update cancellation and refund policies.

Non-Functional Requirements

NFR1: Handle up to 10,000 cancellation requests per hour.

NFR2: Refund processing latency should be under 5 seconds for 95% of requests.

NFR3: System availability target is 99.9% uptime.

NFR4: Ensure data consistency between cancellation requests and payment refunds.

NFR5: Secure handling of sensitive payment and user data.

Think Before You Design

Questions to Ask

❓ Question 1

❓ Question 2

❓ Question 3

❓ Question 4

❓ Question 5

❓ Question 6

Key Components

API Gateway for receiving cancellation requests

Cancellation Service to validate and process requests

Policy Engine to apply rules for refund calculation

Payment Service to initiate refunds

Notification Service for user communication

Admin Portal for policy updates

Database for storing policies, requests, and logs

Design Patterns

Rule Engine pattern for flexible policy management

Event-driven architecture for asynchronous refund processing

Circuit Breaker pattern for payment gateway reliability

Audit Logging for compliance and traceability

Reference Architecture

  +-------------+       +----------------+       +----------------+
  |  User/API   | --->  | Cancellation   | --->  | Policy Engine   |
  |  Gateway    |       | Service        |       | (Rules & Logic) |
  +-------------+       +----------------+       +----------------+
         |                      |                        |
         |                      v                        v
         |               +----------------+       +----------------+
         |               | Payment Service |       | Notification   |
         |               | (Refunds)      |       | Service        |
         |               +----------------+       +----------------+
         |                      |                        |
         |                      v                        v
         |               +----------------+       +----------------+
         |               | Database       |       | Admin Portal   |
         |               | (Policies,     |       | (Policy Mgmt)  |
         |               | Requests, Logs)|       +----------------+
         |               +----------------+

Components

API Gateway

REST API

Receive cancellation requests from users or client apps.

Cancellation Service

Microservice (Node.js/Python)

Validate requests, check eligibility, and coordinate refund processing.

Policy Engine

Rule Engine (Drools or custom)

Apply cancellation and refund rules based on product type and timing.

Payment Service

Integration with Payment Gateway APIs

Initiate refund transactions securely and handle payment responses.

Notification Service

Email/SMS/Push Notification system

Inform users about cancellation status and refund details.

Admin Portal

Web Application (React/Angular)

Allow administrators to create and update cancellation policies.

Database

Relational DB (PostgreSQL)

Store policies, cancellation requests, refund transactions, and audit logs.

Request Flow

1. User sends cancellation request via API Gateway.

2. Cancellation Service receives and validates the request.

3. Cancellation Service queries Policy Engine for applicable rules.

4. Policy Engine returns refund amount and eligibility.

5. Cancellation Service initiates refund via Payment Service.

6. Payment Service processes refund with payment gateway.

7. Payment Service returns success or failure status.

8. Cancellation Service updates database with transaction details.

9. Notification Service sends confirmation or failure message to user.

10. Admin Portal allows policy updates which are saved in the database.

Database Schema

Entities: - User (user_id, name, contact_info) - Product (product_id, type, description) - CancellationPolicy (policy_id, product_type, rules_json, effective_date) - CancellationRequest (request_id, user_id, product_id, request_date, status, refund_amount) - RefundTransaction (transaction_id, request_id, payment_gateway_id, amount, status, timestamp) - AuditLog (log_id, entity_type, entity_id, action, timestamp, details) Relationships: - User 1:N CancellationRequest - Product 1:N CancellationRequest - CancellationPolicy linked by product_type - CancellationRequest 1:1 RefundTransaction - AuditLog tracks changes on all entities

Scaling Discussion

Bottlenecks

High volume of concurrent cancellation requests causing service overload.

Payment gateway rate limits slowing refund processing.

Database contention on policy and request tables.

Notification service delays due to high message volume.

Solutions

Implement request queueing and rate limiting at API Gateway.

Use asynchronous refund processing with retries and circuit breakers.

Partition database tables by product type or region; use read replicas.

Use scalable messaging systems (e.g., Kafka) for notifications with worker pools.

Interview Tips

Time: Spend 10 minutes understanding requirements and clarifying policies, 15 minutes designing components and data flow, 10 minutes discussing scaling and trade-offs, 10 minutes for questions and summary.

Explain how cancellation policies vary and need flexible rules.

Describe separation of concerns: validation, policy evaluation, payment, notification.

Highlight asynchronous processing for refunds to improve user experience.

Discuss data consistency and audit logging for compliance.

Address scaling challenges and solutions realistically.