What Is an EDI Payment?

EDI stands for Electronic Data Interchange. EDI Payments refer to a system that transfers transaction-related documents in a standardized electronic format. These documents can be Purchase Orders, invoices, receipts, bills, etc.

Basically, EDI payment itself is not a payment, instead, it reflects a financial document in the form of Electronic Data Interchange. It facilitates a smooth process. It is because it is based on a digital concept with no paperwork involved. Hence, it also gives rise to an accurate process.

Along with defining EDI payment’s meaning, it is also crucial to understand its application. EDI payments are highly useful for B2B businesses. Due to the paperless concept, these businesses avail of digital power that leads to accuracy and speed for the entire payment process.

5 Key Benefits of EDI Payments

EDI payments play a significant role in business. Here are the benefits of EDI payments as below.

1. High Data Security

EDI works in the form of a closed network and anyone can set up this network with another party to exchange data. Additionally, it is easy to control this network and ensure payment has been received by the right person. Additionally, it utilizes the Value Added Network (VAN) transmission protocol and adheres to the ANSI X12 standard, ensuring a high level of security.

2. Boost Productivity

EDI payments replace time-consuming manual data entry work with digital concepts. This enhances work while saving time. The overall productivity gets enhanced due to no human element.

3. Strengthening Business Relations

EDI payments also contribute to refining business relations. As it works on digital principles, it leads to a faster process instead of a manual data entry concept which is slow. Hence, it impacts on the overall business relationship.

4. Cost-Effective Payment at Scale

Due to automation, the EDI process is a money-saving approach. It is because due to the non-manual payment processes, all the costs associated with printing, storing, filling, and retrieving documents are eliminated. It also cut down the labor cost.

5. Faster Processing

EDI payments are processed at a rapid rate and this is one of the major benefits of EDI payments. The process is instant and financial transactions take place in real time. Unlike ACH processes that work in batch processing, EDI sets up a one-to-one relationship between all the parties. This enhances processing time.

What Are the Different Types of EDI Payments?

There are different kinds of EDI payments with different purposes. The most common types of EDI payments are as follows:

Web EDI: These kinds of payments are carried out over a web browser. The user completes the form, which is subsequently converted into EDI format. Small to mid-size businesses often use this method.

Point to Point/Direct Payments: From the name itself, we can predict that it refers to the direct electronic transfer of funds between trading partners. This leads to a secure transaction without involving any additional payment platform. This kind of method is mostly suitable for large companies where daily financial transactions take place.

Mobile Payments: Mobile payments are an easy and popular approach. Users can utilize the payment apps and complete the payment from their mobile device.

VAN: Value-added networks are types of private connections that are useful for exchanging EDI documents. These systems decode and validate the EDI forms and then send them to the receipt.

Other Types of EDI Payments

EDI 820: For Payment Order/Remittance Advice – This is used for initiating payment and it provides details about payment transactions.

EDI 835: For Health Care Claim Payment/Advice – This EDI payment is useful for healthcare-related payments.

EDI 850: For Purchase Order – This kind of payment process showcases the details of the quantity and types of goods ordered.

EDI 810: For Invoice – A transaction document that the seller shares with the buyer to request payment. It indicates all the details of the invoice.

How Do EDI Payments Work?

After knowing what an EDI payment is, our next step is to identify and understand how EDI payment works. There are a series of steps involved in payment processing. These steps cover generating, processing, and sending electronic payments.

1. Invoice Generation – Seller generates an electronic invoice and then sends it to the buyer.

2. Payment Processing – After receiving the invoice, the buyer initiates the payment process. The buyer also prepares payment information.

3. Payment Instructions – Later on, payment instructions are sent in an electronic form from the buyer to their bank.

4. Fund Transfer – The funds are then transferred to the seller from the buyer’s bank account to the seller’s account.

5. Receipt Confirmation – Seller, in the end, sent the receipt to the buyer acknowledging the payment received.

The entire process takes place in a secured network. Additionally, it has less human involvement which leads to lower chances of errors. It also leads to cost-effective processing.

What Is the Key Difference Between EDI, ACH, and EFT?

So far, we have defined EDI payment meaning. Now, we will understand how EDI is different from ACH and EFT payments. Often, people get confused between EDI, ACH, and EFT. The major thing is that EDI payment is not the payment itself, whereas ACH and EFT are digital payment methods. Moving further, let’s explore more information.

EDI vs ACH

EDI refers to the exchange of financial documents and data in digital form. ACH (Automated Clearing House) is a type of network through which funds are transferred between bank accounts in the USA.

EDI follows strict international guidelines for sending electronic documents. The National Automated Clearing House Association (NACHA) governs ACH payments.

EDI is often useful for companies whereas ACH is useful for companies and individuals to transfer ACH payments.

EDI vs EFT

EDI refers to the EFT method or a part of a broad spectrum of electronic data interchange processes, whereas EFT (Electronic Funds Transfer) refers to a broad term of electronic payment method.

EDI refers to the exchange of financial documents whereas EFT is an electronic transfer of funds.
EDI requires a standardized format to streamline business information, while EFT transfers digital funds directly without the need for standardized business documents.

EFT vs ACH

Electronic funds transfer is a broad term that covers electronic payment types, and ACH is a part of it. Not all EFTs need to be ACH transactions, but every ACH transaction is a form of EFT.

ACH is limited to domestic transactions within the USA, whereas EFTs are available for domestic and international transactions.

Are There any Challenges Involved With EDI Payments?

Yes, there are a few challenges with EDI payments which are as follows:

• Training is required for running and managing EDI software.
• There is a need to install cyber security protocols.
• If there is not the right maintenance process, the EDI network gets costly.
• Data backups are critical to the EDI infrastructure setup.
• Always needs ongoing maintenance and upgrades.

Wrapping Up

EDI payment is a useful concept to streamline the accounting process. It speeds up the transaction, saving cost and reducing the errors.

We can expect further advancement in the near future. This will enhance the process and help businesses to have clear insight into the company’s finances.

Frequently Asked Questions