What are EDI Payments, and How Do They Work?

Electronic data interchange, or EDI, is a rapidly growing fintech field worth billions of dollars. It has been a long-standing requirement in health care, where government agencies and insurance providers have encouraged the most secure data processes for claims billing and payment. Today, EDI is increasingly common in other sectors, including e-commerce, retail, and banking.

But what are EDI payments, how do they impact the payment process, and how do they differ from manual payments? Find out more about EDI and its benefits for any financial transaction below.

What are EDI payments?

First, you have to understand what EDI is. It stands for electronic data interchange, and it provides a secure way to transmit information — not just financial data.

EDI transactions are payments made via secure EDI processes. It's a safer way to transfer payment data between financial institutions, businesses, and other entities, in part because it eliminates any paper record.

EDI payments are critical for businesses, as they protect the individual transaction and all the information embedded in it. This reduces the risks associated with cybercrime and helps keep customer and business financial information confidential.

Information contained in the digital "documents" associated with EDI payments may include the following:

• Invoice numbers and related data, such as purchase orders or customer account numbers
• Specific payment account information, such as account and routing numbers
• Payment amounts
• The date associated with the payment, which could be the date the EDI data is created or a date in the future
• Method of payment
• Payment numbers, such as a check number or a business-specific numeric identifier
• Contact details for the payer and payee, such as email address, phone number, and mailing address

Types of EDI payments

There are two major types of EDI payment methods.

• Web EDI: This type of EDI occurs within an internet browser and uses a third-party or SaaS EDI solution to facilitate the transfer of payment data. This is the most common option used by small and mid-sized businesses that may only need EDI occasionally.
• Direct EDI, or point-to-point payments: With this method, two business partners connect directly to facilitate the EDI payments. This ensures higher security and control but requires investing in more technical infrastructure, making it a popular choice for large enterprises.

Benefits of EDI payments

EDI payments bring numerous benefits. Dedicated electronic data interchange adoption provides these advantages:

• Streamlines payment processes, including reducing processing time. Electronic billing and EDI payments reduce the time it takes to manage accounts payable, potentially cutting operational costs for businesses while speeding up the receipt of payments for their receivables.
• Increases document processing speed, in part due to the standard format. Because EDI information must conform to specific standards, every business that receives these payments knows what to expect. With remittance information in one particular format, it's easier to automate payment processing, allocate correct amounts to line items, and manage accounting procedures.
• Helps establish trust with customers and partners. EDI is an established, secure method for transmitting payment information. Customers and business partners will have more confidence in your business, knowing their data is being handled carefully.
• Reduces opportunities for error. Many EDI solutions offer validation protocols. For example, systems may check purchase order approval data against invoice data before allowing a payment to be processed, reducing payment errors and chargebacks.

How EDI payments work

To understand how the EDI payment process works, let's compare it to a manual payment process in a hypothetical situation.

In this scenario, a chain of local restaurants has an account set up with a regional food service supply store. The relationship allows the restaurant company to order and receive equipment and supplies from the supply store and pay the invoices related to the purchases on net 15 terms.

Here's how the order and payment process might look with manual vs. EDI payment methods:

3 examples of EDI payments

Anytime you work with business documents containing payment information, proper EDI formatting and processes are crucial. Relevant documents include invoices, purchase orders, shipping notices, billing statements, customer orders, bills of lading, and customs documents.

Here are three specific examples of EDI billing and payment situations and the EDI number that matches each.

• EDI 820, payment receipt: This is also called the remittance advice or payment order document. It lets the payee know that the payer issued payment, how much the payment is, when it was issued, and what it was for.
• EDI 828, debit authorization: This part of the electronic payment process involves notification to the financial institution that the account holder has authorized a debit to its account.
• EDI 812, credit or debit adjustment: This EDI transaction set helps process offsets or credits within payment processes. You can use this transaction set to denote a debit or credit and include the information about what is being debited or credited and why.

For other EDI examples, check out the Target EDI transactions that Orderful supports.

EDI, ACH, and EFT: key differences

Many people use the terms EDI, ACH, and EFT interchangeably, even within the financial sector, but they all mean something different.

• EFT, or electronic funds transfer, is a term that encompasses any transfer of funds that is made electronically. Examples include direct deposits from an employer, credit and debit card transactions, and wire transfers.
• ACH payments are a specific type of EFT processed through the automated clearing house. Direct deposits from employers are one of the most common ACH transactions.
• EDI, or electronic data interchange, doesn’t specifically refer to payment. It’s the standardized data process by which many digital transactions, including payments, can occur.

Make Orderful your trusted EDI partner

EDI payments support efficiency, productivity, and security for businesses of all sizes and types. If you haven't found an EDI solution or want to enhance your account and payment processes, talk to an Orderful expert to learn more about the solution that’s right for you.