EDI (Electronic Data Interchange) is the process of business to business exchange of documents in a standard format electronically. This makes it extremely useful for the EDI payments (along with exchanging other documents) because it provides a secure mode of payment transfer from computer to computer.
EDI payments complete an EDI order cycle by having the supplier paid by the buyer who bought their product. Let’s consider an example under ANSI X12 standards An EDI 820 is a payment order or remittance advice document which is sent in response to EDI 810 (Invoice). Generally, it is used to communicate initiation of a payment by a buyer to a seller. This streamlines and fastens the payment process like the overall order cycle because both parties have visibility and transparency into payment details. Businesses are seen to improve their cash flow with an efficient process like EDI.
What does an EDI 820 involve?
An EDI 820 involves information about the payer and payee name and address, total amount, method of payment, account and bank routing information, currency, credit or debit information, check number and payment date.
How do EDI payments work?
As soon as the buyer receives an invoice (EDI 810) from the seller, the buyer sends out the payment remittance information in the form of an EDI 820 to the seller to show the intent to pay. Then, the seller transmits this information to its bank for receiving the payment through EDI or any other method decided between the two entities.
The bank receives the information from the seller (through EDI or any other mode) and converts it into the format necessary for its transmission through the Automated Clearing House (ACH) as an ACH transaction. The ACH processes the payment and its associated information to the seller’s bank. Then, the bank credits the seller. The seller receives a notification that the funds are posted in the company’s bank account.
How do EDI payments differ from manual payments?
Manual payments require human labor to send payment information through mail, fax, or email and you have to pay them for manual tasks like data entry into different systems. EDI payments as a part of an overall EDI order processing are automated between organizations and within internal systems to speed up operations, eliminate any extra steps and avoid errors.
What’s the difference between EDI, EFT, and ACH?
EDI, EFT and ACH can easily be misunderstood as they are used synonymously when talking about bank transactions. Do they mean the same?
EDI is a standardized format for exchanging documents electronically only and not a type of electronic payment. In short, EDI does not technically pay you. It is a way to send and receive payment details between two parties to make the order cycle more efficient.
The ACH (Automated Clearing House) or electronic transfer of funds is a financial system used for direct payments and direct deposits (in short a system that actually pays you). This is an alternative to checks, cash, credit cards and wire transfers for transferring money from one bank to the other. ACH payments are faster than checks or credit card payments.
ACH is considered a central system that collects and batches financial transactions and processes them at intervals throughout the day. Any company or individual can originate a direct deposit or payment using the ACH network.
The common thing between ACH and EDI is that both contain remittance details.
EFT is also called electronic funds transfer that embodies all types of electronic payments including ACH. EFTs include credit card, online and mobile payments, direct deposits and wire transfers.
ACH payments out of the EFT are the most secure because they undergo a rigorous due-diligence process by having to make it through a clearing house in between. ACH can only be used when making a digital transfer of money between two banks vs EFT can happen real-time with or between banks.
EDI Support’s Recommendation
Understand that EDI payments are an important part of the overall order cycle. Considering the benefits of EDI, it can be an important growth strategy for your business. As a best practice, we always recommend to integrate your EDI system with your accounting software through file or APIs to make your business processes more efficient and error- free. You need to work with a team of experts who can suggest the best and affordable options to connect with your trading partners and customers.
Here’s all you need to know about how EDI and API differ in their applicability along with pros and cons for respective technologies.