For business owners, protecting their assets — including their and their clients’, customers’, and vendors’ information — is of the utmost importance. The transfer of information and data between multiple entities can result in errors, breaches, and delays that small business owners simply cannot afford. As a result, entrepreneurs are incorporating new systems into their payment processing to streamline and protect payment information
What are EDI Payments?
EDI stands for “electronic data interchange” and it is not actually a payment according to NACHA, the electronic payment association. They’re a more secure alternative to managing sensitive data in a way that is encrypted and easily managed. EDI payments process quickly and offer businesses a more streamlined accounting process. EDI payments are used as descriptives for remittance information, invoices, and other documentation. Simply put, EDI payments replace paper documents.
This document typically includes information such as:
- Purchase order or invoice number
- Payment amount
- Payment/remittance date
- Method of payment
- Check or payment number
- Payer and payee contact details
- Account and bank information
- Credit or debit confirmation
Types of EDI Payments
There are different types of EDI payments that a small business owner should know about. These EDI transactions include:
- Purchase orders
- Payment documentation
Difference between manual payments and EDI
Manual payments require human interaction and data entry which typically shows up in the form of your business sending invoices or remittance documents through mail, fax, or email. EDI payments aim to eliminate people from the process while simultaneously speeding up payment operations with the function of reducing and eliminating errors.
In comparison, EDI payments reduce many steps that manual payments do not.
The simplified EDI payment process is as follows:
- Prepare the document.
- Translate the document into EDI format.
- Transmit the EDI document to your trading partner.
In business, this translates to:
- The buyer’s internal system submits a purchase order to the supplier’s internal system.
- The supplier’s internal system receives the purchase order.
- The supplier’s internal system submits an invoice to the buyer.
The manual process is twice the steps:
- The buyer generates a purchase order.
- The buyer emails or faxes the purchase order to the supplier.
- The supplier receives and manually enters the purchase order into an internal system.
- The supplier prints an invoice.
- The supplier emails or faxes the invoice to the buyer.
- The buyer receives and enters the invoice into an internal system for processing.
EDI vs. ACH vs. EFT
EDI payments are often used interchangeably with ACHs and EFTs as being the same type of payment methods, however, they all serve a variety of functions that are different. In addition, each has a different operational and legal meaning, so it’s important to understand their differences.
An ACH, or automated clearing house payment, refers to an electronic transfer of funds, like a direct deposit, business-to-business (B2B) transactions, or employee payroll.
An EFT or electronic funds transfer is an actual form of payment. EFTs fall under the umbrella of all electronic payments including wiring money or paying a bill using a credit or debit card. An ACH payment can be considered a form of EFT payment.
Benefits of EDI payments
EDI payments replace manual labor and give business owners automation for payment data. In addition, EDI payments also:
- Decrease processing times
- Improves business productivity
- Very cost-effective: Eliminating the use of contracting someone
- Increases document processing speed
- Forges a better relationship with business partners
One type of EDI payment transaction that is extremely beneficial to small businesses is called an EDI 820. These can also be referred to as a “payment order” or “remittance”. An EDI 820 payment removes any need to send paper documents and manages your invoice workflow. By automatically submitting data into your receivable system, this is how EDI 820 keeps your costs down.
When to use EDI payments
EDI payments are used when you want to confirm the payment details to the seller. They are typically issued in response to an invoice. Businesses use EDI payments when they want to cut costs and processing times, keep payment information secure, and easily identify any discrepancies.
Is an EDI payment a direct deposit?
It’s important to keep EDI payments in their own basket so as to not be confused about where they fall in business and how they can be used. An EDI payment is not a direct deposit but an automated replacement to the manual purchase order payments system. An ACH, which falls under the EFT umbrella, is a direct deposit and as mentioned above EDI payments and ACHs are different. Both you can see reflected through your bank account and bank statement, but EDI payments are not synonymous with direct deposit.
What does EDI mean on my bank statement?
EDI on a bank statement means that your business and another have exchanged payment information digitally (computer to computer). Some financial institutions process their bank statements through EDI, but typically offer this service based on the type of account you have. It is similar to setting up the ACH network to receive an ACH credit – it is not automatic. If you’re looking to enroll your business into EDI payments for the first time, you should talk to your bank and see how it best fits your business.
Why did I get an EDI payment?
You would have received an EDI payment if your business revolves around selling goods and creating purchase orders. As the buyer you would get EDI payments upon identifying the types, quantities, and agreed prices for products or services of the seller. It is used to control the purchasing of products and services from external suppliers.
This can include businesses such as:
- Automotive industry entrepreneurs
- Healthcare and pharmaceutical companies
- Construction companies
No matter what you do in business, you may have more questions to refine or reassure your decisions. Here are the most frequently asked questions about EDI payments:
Who typically uses EDI?
EDI services are used in most major industries which include aerospace, automotive, finance, retail, and construction. EDI is considered the highest standard for the electronic exchange of documents from one company to another, offering efficiency which these types of companies need most.
Is EDI difficult to implement?
As your business grows and you begin doing business with more partners and clients, the systems you put in place may increase in complexity, but also efficiency. EDI payments’ difficulty depends highly on the type of EDI solution your business chooses. The web-based solution only requires logging into your client’s web portal and simply filling in whatever the necessary online forms are before having to send the required documents. The more complex the system will require necessary software across your company’s network as well as back-office integration.
What types of EDI solutions are available for me?
There are three types of EDI solutions which include EDI software, web-based EDI, and EDI service bureaus.
- Lives directly on a computer that your company owns
- Offers the highest level of flexibility and control
- Improves business process efficiency
- Is an interactive process that also requires manual entry
- Does not offer much integration
- Has fewer options to control day-to-day operations
EDI service bureaus:
- Perform your EDI operations as though they were a contractor
- Use a pay-as-you-go method
- Has the least control over your day-to-day operations
Nav’s business marketplace aims to serve small businesses by providing readily available payment options and other business services that include automation, integration, and more. These options are set to help your business streamline its productivity and efficiency.
This article was originally written on April 22, 2022 and updated on April 24, 2022.