What Is an EDI Payment? How It Works & How It Differs from ACH & EFT
The efficiency and security of financial transactions are paramount for businesses across the globe. Confusingly, a wide range of methods for exchanging payment information are available, and the relevant differences between them are not always clear. One such method is Electronic Data Interchange (EDI), which utilizes a ubiquitous set of data standards to ensure that payment information is secure, interoperable, and automated.
This blog explores the intricacies of using EDI for payments, their types, functioning, benefits, and how they compare to other popular electronic payment methods like Automated Clearing House (ACH) and Electronic Funds Transfer (EFT). Additionally, we'll give a brief glimpse into how CData facilitates reliable EDI transactions.
What are EDI payments?
The term ‘EDI payments’ is an umbrella that encompasses the exchange of several types of EDI documents that relate specifically to purchasing and fulfillment. Importantly, EDI payments are not the direct transfer of money between bank accounts. Rather, EDI documents are used to catalogue and communicate the necessary transfer of money to external parties.
The common EDI document types described as EDI payments have corollaries from the days of paper documents: Purchase orders, invoices, and remittance advice documents. In the past, these types of documents would be exchanged through manual ad-hoc processes like mail or fax. EDI emphasizes interoperability between software systems, so the transfer, reception, validation, integration, and confirmation of this critical business data can all be done automatically by an EDI technology platform.
Thus EDI payments provide businesses with a standardized way of exchanging data surrounding the payment process for an order in a way that leverages all the benefits of the digital revolution: security, automation, reliability, transparency, and speed.
What are the main types of EDI payments?
EDI payments are a specific subset of EDI transactions that involve the payment process for orders and purchases. The most common types include:
EDI 820: Payment Order/Remittance Advice, used for initiating payment and providing details about the payment transaction.
EDI 835: Health Care Claim Payment/Advice, specifically designed for healthcare-related payments.
EDI 850: Purchase Order, used to initiate a payment process and provide information about the type and quantity of goods ordered.
EDI 810: Invoice, used straightforwardly to invoice a purchasing party for orders confirmed and accepted by the fulfillment party.
These documents enable businesses to carry out financial transactions while ensuring that all the related data is accurately communicated and recorded.
How do EDI payments work?
The EDI payment process involves several key steps, though not every step is necessarily a part of every EDI payment interchange:
- Purchase initiation: A purchasing party initiates a payment process, usually by sending an EDI 850 Purchase Order to a trading partner that indicates which goods are intended to be purchased.
- Purchase confirmation: The fulfillment party receives and processes the purchase order, confirms the validity of the request and the availability of the requested goods, and sends an EDI 855 Purchase Order Acknowledgment to the purchasing party indicating that the order has been understood and accepted.
- Invoice: The fulfillment party sends an electronic invoice in the form of an EDI 810 to request the appropriate amount of payment
- Remittance: The purchasing party sends an EDI 820 Payment Order containing details about the impending payment, and then initiates an electronic transfer of money between the relevant bank accounts.
This automated workflow ensures accuracy, security, efficiency, and above all transparency and non-repudiation in financial transactions between trading partners.
What are the benefits of using EDI payments?
EDI payments offer numerous benefits to businesses, including:
- Reduced processing costs: Automating payment processes reduce the costs associated with manual handling and processing of payments.
- Improved accuracy: Minimizing manual entry reduces the risk of errors in payment processing.
- Faster transaction processing: EDI allows for quicker processing of payments, improving cash flow and operational efficiency.
- Enhanced security: Secure transmission protocols and standardized formats decrease the risk of fraud and unauthorized access.
- Data transparency and auditing: The rigid structure of EDI payments ensures that an electronic trail exists for all intra-business payments and can thus be easily audited and understood.
What is the difference between EDI payments, ACH, and EFT?
EDI payments, ACH, and EFT all exist within the same domain of digital payment processing. However, the scope and relevancy of the three terms are different enough that they are not direct alternatives to each other.
EFT, or Electronic Funds Transfer, is the broadest term of the three that encompasses any digital exchange of money between bank accounts. ACH, or Automated Clearing House, is a type of EFT with its own set of standards, protocols, and technical details. Thus, ACH enables an organization to directly transfer money to a trading partner when appropriate.
EDI payments are a series of documents exchanged between partners that do not directly move money between bank accounts, but rather tracks the business conversation that surrounds a purchase, invoice, and remittance. Thus, EDI payments are often accompanied by a type of EFT so that an organization can have an automated digital ordering and fulfillment process, as well as a digital funds transfer process.
How CData facilitates reliable EDI transactions
Effective EDI integration depends on sophisticated software tools that provide critical benefits like EDI translation, no-code mapping, and automated business-to-business communication. CData Arc dramatically simplifies the process of exchanging EDI payments with trading partners and moving away from manual and ad-hoc payment approaches. By automating payment reception and transmission, your business can eliminate manual data entry errors, reduce processing times, and ensure that their payment data is accurate and up to date.
Arc provides no-code EDI translation and mapping into other data formats like files, databases, ERP systems, and more – all without needing a dedicated EDI team or specialized knowledge. Whether it's converting EDI formats to match in-house database schemas or aggregating inventory data from multiple sources, CData Arc's intuitive interface and extensive customization options empower businesses to tailor their EDI processes to their specific needs.