The abbreviation EDI stands for Electronic Data Interchange. This automated computer-to-computer data exchange system enables businesses to communicate using standardised document formats as an alternative to traditional paper-based communication. EDI, developed by the American National Standards Institute (ANSI), is widely used by retailers worldwide for document communication, business process automation, and payments.
In the payment world, EDI can be used to create and exchange purchase orders, invoices, bills, and other payment information paperlessly, increasing efficiency, improving accuracy, and lowering operational costs for business owners.
Let’s dig deeper into the EDI payments meaning.
EDI payments are not really a payment method but rather a standard form of transferring payment information between two parties. This process involves three main steps: document preparation, converting it into an EDI format, and transmitting the EDI document to a partner.
Let’s say you’re a retailer who wants to submit a purchase order to the supplier. To make this possible with EDI, you’ll need to create a file containing comprehensive information about the order, such as purchase order date, names and codes of the purchased items, requested ship and delivery date, location, etc. The next step is to send your document through an EDI translation software to convert your internal data format to a standard, machine-readable EDI format. After this, your EDI software will send the purchase order to the supplier’s system.
When the supplier receives your EDI 850 purchase order, they will submit an invoice by repeating the same procedure on its part. Data security and control are maintained throughout the transmission process using passwords, user identification and encryption.
Being fully automated, the EDI-enabled process takes several hours to complete, helping a business to communicate documentarily with multiple partners without manual entry.
There are two types of EDI payments that business owners can choose from:
Typically, direct EDI payments are used by big enterprises that need to exchange a large number of EDI documents daily. Medium or small businesses that only occasionally need to exchange documents prefer the web-EDI format.
EDI payments are often confused with ACH and EFT payments. However, they all perform different functions.
EFT (Electronic funds transfer) is an umbrella term for all electronic payments involving ACH (Automated clearing house) payments as one of its types. ACH is an electronic network for batch processing large debit and credit transactions. Some refer to EDI as ACH payments because they both include remittance information, such as customer account numbers. But in fact, EDI is only a data exchange format, while ACH and EFT are directly related to moving funds between banks.
The EDI network is widely used for communication between business partners who want to automate all document-related processes and eliminate the need for human involvement.
Here are a few apparent advantages that EDI payments provide:
According to CData, EDI can speed up business cycles by 61% by automating data sharing processes. No costly errors, late delivery of documents, or loss of critical information. Using the EDI network helps business owners maintain good relationships with partners and focus on priority tasks instead of manually generating multiple documents.
Capable of exchanging thousands of document types, EDI can be useful for a wide range of industries. This list includes but is not limited to:
EDI is a globally accepted business language that helps companies ensure reliable information sharing and quickly adapt to rapidly changing market needs.