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What Are EDI Payments? Difference between EDI, ACH, and EFT

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Paper transmission of information between two entities can result in security breaches, errors, communication delays, and misinterpretations. Electronic Data Interchange (EDI) is an encrypted, secure computer-to-computer document exchange offering an alternative to processing and tracking information with paper. EDI eases the management and flow of business transaction information between business trading partners.

What is an EDI Payment?

An electronic data interchange (EDI) payment is a common type of electronic payment that uses a standardized format for businesses to exchange payment data computer-to-computer.

Standard types of documents that businesses send through EDI include:

  • Inventory and customs documents
  • Shipping notices
  • Bills of lading
  • Payment documents
  • Invoices
  • Purchase orders

EDI payments are fast. It’s easy for businesses like yours to use an in-house software system or outsource the service to electronically send and receive business documents between your business and your partner companies.

Types of EDI Payments

Many types of EDI payment methods are available to businesses. If you are considering EDI for the first time or are expanding your existing EDI platform, there is at least one method to fit your budget, technology structure, and business transaction needs. Here are two of the top EDI payment methods and their descriptions.

Web EDI processes EDI payments using a standard Internet browser. Businesses use various online forms to exchange information. Web EDI works well for small- and medium-sized businesses that only occasionally need the exchange service.

With Direct EDI/Point-to-Point payments, you individually connect with your business partners. This method offers control for all business partners and is typically used by larger suppliers and customers with multiple daily transactions.

Manual vs. EDI Payment Process

Is your business still sending invoice and remittance documents through email, postal mail, or fax? These methods all involve human interaction. Even email, although electronic, is sent and received by people and not computers. Eliminating people from the transmission process speeds up payment operations and reduces (or eliminates) errors.

There are three basic steps to sending documents using the EDI process:

  • Prepare the document.
  • Translate the document into EDI format.
  • Transmit the EDI document to your trading partner.

Compare the detailed manual transmission process with the EDI payment process below.

Manual Business Payment Process

  • 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 Business Payment Process

  • 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.

As you can see, there are twice as many steps involved with the manual process as with the EDI process. 

What’s the Difference Between EDI, EFT, and ACH?

EDI, electronic funds transfer (EFT), and automated clearing house (ACH) are all different. Even experienced financial professionals sometimes get the three payment-related methods confused. Different companies across industries have different names for the same thing, and they sometimes use the same name for different things. Some companies commonly refer to ACH payments as EFT or EDI, when EDI is not a payment but an electronic data exchange format.

EFT and ACH payments are electronic payment types. However, ACH is a type of EFT payment. ACH involves moving funds from one bank to another. EFT is an umbrella term that covers ACH payments, wire transfers, and most other types of digital payments. EFT payments are processed through banks using the ACH. EFT payments are also called ePayments because they are transacted entirely electronically, or online.

Like EDI, ACH includes remittance information. Some refer to EDI as ACH payments for this reason, and remittance information is in EDI format. To be clear, EDI is not a form of payment. It is a data format used for computer-to-computer data and message exchanges for a variety of payment and payment-related processes. EDI, unlike EFT and ACH, is typically used to format business invoices and remittance information.

Why Should You Use EDI Payments?

Manual business communication processes can be costly. EDI payments improve your business productivity and cost savings by eliminating the human element from the process. Instead of mailing documents, making EDI payments decreases processing time. Your business trading partners receive invoices faster, and both the sending and receiving parties can rely on EDI’s accuracy as opposed to manual data entries.

Buyers and sellers make different types of EDI transactions to transfer payment data. One type of EDI payment transaction is an EDI 820, also known as a Payment Order or Remittance Advice document sent in response to an EDI invoice or EDI purchase order.

If you want to streamline your chain supply process, use an EDI 820 payment and eliminate the need to send paper documents. To help manage your invoice workflow, EDI 820 automatically submits data directly into your receivable system, thus helping to keep  your cost of doing business down. 

Benefits of EDI Payments

The computer-to-computer EDI process of exchanging business payment documents provides major benefits to businesses. Some of these benefits include:

  • Improved relationships with business partners
  • Minimized processing errors
  • Increased document processing speed
  • Reduced business costs

Your business could greatly benefit from switching from a manual payment document transmission system to the EDI system of exchanging documents and data with your business partners. 

Summing It Up

There are several types of available EDI payment methods to connect your payment transactions with your business trading partners. You can choose the right method based on the size of your business and the frequency of your transactions.

Although financial professionals share common language, names, and acronyms for payments and payment-related matters, it is important to know the difference in definition and meaning of the terms EDI, EFT, and ACH.

With the EDI payment process, you can improve your supply chain structure, eliminate human involvement, and save on business operating costs.

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