Financial

What Is Financial EDI? Financial EDI (FEDI) is the computer-to-computer exchange of payment and payment-related information between companies using a standard format. Financial EDI works much like non-Financial EDI - which involves the electronic exchange of business data such as price quotes, purchase orders, and shipping information - but is also significantly different in that, to move a payment, a bank must be involved. Because of this difference, the buyer and seller must work closely with their respective banks to effect a Financial EDI transaction. Today, it is estimated that 60,000 companies are doing EDI in the U.S. and a growing percentage is starting to adopt FEDI.

This is the sequence of events:

* The buyer, or originator, electronically extracts payment information from the company's accounts payable system.
* The buyer formats the data into an EDI ANSI standard, the ANSI 820 transaction set, or the ANSI 835 transaction set for health care. (This is usually done by sending the file through an EDI translation software package.)
* The buyer then transmits an ANSI 820 format to its bank for processing.
* The bank then takes the 820 data and puts it into a format so that it can be sent through the Automated Clearinghouse network as an ACH transaction.
* The ACH network then delivers the payment data to the seller's, or receiver's, bank.
* The receiving bank credits the seller's account with the proceeds and delivers the remittance information to the seller for automatic accounts receivable posting.

The remittance data can be delivered electronically in a variety of formats: ANSI 820, 835 or 823 format (true EDI formats), and in a BAI format. (Information can also be sent in other ways that cannot generally result in automatic cash application for the seller: through a bank's on-line balance reporting system, or in a paper report via fax or mail.)

The Benefits of Financial EDI

To be successful in any business practice usually means that all the participants affected by the process share in the benefits. In Financial EDI, there are ample advantages for both the buyer and the seller.

The buyer enjoys a number of benefits: increased productivity, the ability to use a less expensive payment method (electronic vs. paper check) that does not require reconciliation, a reduction in the risk of fraud, and the ability to invoice electronically. The seller benefits because it can reduce the average age of its receivables, lower processing costs by automatic A/R posting, improve quality by minimizing errors, and generate predictable cash flows. The result of these benefits is that both buyer and seller become more valued trading partners to one another.

 

Expanding the Use of Financial EDI

Financial EDI has been actively used by corporations for the last five or six years and has increasingly become the payment method of choice as more and more trading partners have seen the benefits provided to their competitors and have consequently adopted an EDI platform for their own company.
As corporations reengineer their current business practices, many are looking to outsource their payments processing, which results in a single file of all payment instructions being sent to the bank in an EDI format. The bank will then execute all payment orders, including ACH and wire transfers, and will also print and mail the payable checks. In this way, a company can deal electronically with all of its payments even though some are being converted to paper checks by the bank for those trading partners who still want the paper. On the collection side, companies are also streamlining the receivables process by having remittance information collected by their bank - whether through the ACH, lockbox, or wire transfer payments - and then sent electronically to the companies' accounts receivable system for automatic cash application. Here again, the company is deriving the benefit of streamlined, automated posting for all of its collections, even though some or perhaps most of its payments received are paper based.

 

Another Kind of Receivables Application

Several financial institutions are going one step beyond this and are beginning to provide true matching of accounts receivable. In this scenario, a company has outsourced a good portion of its A/R processing to its bank.

 

It works in the following manner:
* The company electronically sends its receivables file to the bank on either a daily or weekly basis.
* The bank stores this data in a data base.
* As lockbox receipts or ACH collections are received, the database is queried to determine if there is a match between an open receivable item and a remittance.
* If there is a match, then the database is appended with the remittance information and a file of the matched items is created.
* Unmatched items are separately batched.
* Optionally, a bank might display the unmatched remittance information on its balance reporting systems.
Also optionally, the company can then view this data and, based on information it has, now match the previously unmatched items.
* Matched items and the remaining unmatched items are electronically sent to the customer in any desired format, EDI or proprietary.
* The customer automatically updates its accounts receivable system.

 

Financial EDI for Consumer Payments

Although Financial EDI has been confined to business-to-business transactions, it can also be successfully deployed in the handling of consumer payments and associated remittance data. As an example, consumer payments initiated through a bill payment service or a home banking system can be directed through Visa's ePay network by having this data handled by a bank's Financial EDI system. The bank can reformat the remittance data and deliver it electronically to the biller (for example, a utility company) for automated posting. This new way of using Financial EDI benefits large billers by eliminating the expense and operating inefficiency of receiving a check and a list and having the billet manually key in the remittance data for cash application.

Conclusion

Financial EDI is clearly playing a more dominant role in today's payment and collection cycles. The benefits of using EDI are now well known and, at along last, the mystery surrounding this new way of doing business has vanished as more companies understand the "language" of an EDI transaction.
Perhaps the most important point to remember about EDI - a fact which is recognized by those that have been involved with it for a while - is this: EDI is not an end in itself; it is a means to an end, a powerful tool that can be used to achieve a more productive, efficient and competitive corporation.