EDI in Finance and Banking :

Electronic data interchange (EDI) is the process of electronically transferring information in a standardized, machine-readable format. In the same vein, financial EDI refers to the electronic transfer of payments, payment-related information, or other financial documents in a standardized, machine-readable format. Financial EDI payments are predominantly utilized in the banking, securities settlement, and insurance industries.

A financial EDI payment involves the electronic transfer of funds through a network like the Clearing House Interbank Payments System (CHIPS), which is operated by The Clearing House Association LLC. Financial institutions employ this system to settle their daily obligations to one another. It enables two parties, namely the buyer and seller, to agree on the price of goods or services and make instant payments without the need for physical exchange of cash or checks. This is particularly advantageous for high-volume transactions that require immediate payment from customers.

Businesses utilize financial EDI to transmit payments between each other, while governments rely on it for transferring tax payments. Financial EDI plays a crucial role in today's globalized economy, as it facilitates the swift and efficient transfer of payments on a large scale.

To initiate a payment through financial EDI, a company or institution follows a series of steps. Firstly, the buyer extracts payment information electronically from their accounts payable system. This data is then formatted according to the EDI standard and transmitted to the organization's bank. The bank further formats the information to comply with the requirements of the Automated Clearing House (ACH) Network, which facilitates the transmission of the payment as an ACH transaction. The ACH network delivers the payment and its associated data to the seller's bank, where the seller is credited accordingly. Simultaneously, the payment information is automatically transmitted to the seller's accounts receivable system, allowing them to verify the receipt of funds.

Below, we provide some common examples of financial EDI transaction codes in ANSI X12 :

103 Abandoned Property Filings

105 Business Entity Filings

113 Election Campaign and Lobbyist Reporting

130 Student Educational Record (Transcript)

131 Student Educational Record (Transcript) Acknowledgment

132 Human Resource Information

133 Educational Institution Record

135 Student Aid Origination Record

138 Educational Testing and Prospect Request and Report

139 Student Loan Guarantee Result . Loan guarantee agencies use EDI 139 to inform a lender or school about the status of a loan guarantee.

144 Student Loan Transfer and Status Verification. Lenders and guarantors use this transaction to send or receive information about transferring student loan ownership.

146 Request for Student Educational Record (Transcript)

147 Response to Request for Student Educational Record (Transcript)

149 Notice of Tax Adjustment or Assessment

150 Tax Rate Notification

151 Electronic Filing of Tax Return Data Acknowledgment

152 Statistical Government Information

153 Unemployment Insurance Tax Claim or Charge Information

154 Secured Interest Filing. If you have to file Uniform Commercial Code (UCC) financing statement forms, liens, judgments, and other statements of secured interest, or exchange secured interest filing information, this is the code you use. As the UCC applies across the US, this is a very common transaction.

155 Business Credit Report

157 Notice of Power of Attorney

158 Tax Jurisdiction Sourcing

175 Court and Law Enforcement Notice

176 Court Submission

179 Environmental Compliance Reporting

185 Royalty Regulatory Report

188 Educational Course Inventory

189 Application for Admission to Educational Institutions

190 Student Enrollment Verification

191 Student Loan Pre-Claims and Claims

194 Grant or Assistance Application

195 Federal Communications Commission (FCC) License Application

196 Contractor Cost Data Reporting

197 Real Estate Title Evidence

198 Loan Verification Information

199 Real Estate Settlement Information

200 Mortgage Credit Report

201 Residential Loan Application

202 Secondary Mortgage Market Loan Delivery

203 Secondary Mortgage Market Investor Report

205 Mortgage Note

206 Real Estate Inspection

245 Real Estate Tax Service Response

248 Account Assignment/Inquiry and Service/Status

259 Residential Mortgage Insurance Explanation of Benefits

260 Application for Mortgage Insurance Benefits

261 Real Estate Information Request

262 Real Estate Information Report

263 Residential Mortgage Insurance Application Response

264 Mortgage Loan Default Status

265 Real Estate Title Insurance Services Order

266 Mortgage or Property Record Change Notification

280 Voter Registration Information

283 Tax or Fee Exemption Certification

288 Wage Determination

521 Income or Asset Offset

527 Material Due-In and Receipt

540 Notice of Employment Status

810 Invoice

811 Consolidated Service Invoice/Statement

812 Credit/Debit Adjustment. Instead of sending a credit or debit memo, EDI 812 serves as a multi-directional notification to trading partners to let them know about adjustments and/or bill backs.

813 Electronic Filing of Tax Return Data

814 General Request, Response or Confirmation

819 Joint Interest Billing and Operating Expense Statement

820 Payment Order/Remittance Advice. This transaction has two purposes: the first is to alert trading partners of an intent to pay an invoice, and the second is to order a financial institution to pay a seller.

821 Financial Information Reporting. EDI 821 reports balances, detail, summary financial transactions, and other related financial account information.

822 Account Analysis

823 Lockbox. This transaction is the electronic version of a paper lockbox; it transmits incoming payment information and totals from a bank or any other lockbox service provider to a lockbox owner.

824 Application Advice

826 Tax Information Exchange

827 Financial Return Notice. Sometimes, a transaction cannot be processed by the originating financial institution. EDI 827 tells the originator that an 820 transaction cannot go through.

828 Debit Authorization. Payers use EDI 828 to provide information to a financial institution regarding authorized debits and it is often utilized in conjunction with ACH and/or EFT payments.

829 Payment Cancellation. A payer will use EDI 829 to cancel a previously authorized electronic payment from a financial institution prior to funds being released.

835 for submitting payments in Healthcare .

837 for submitting claim information in Healthcare.

831 Application Control Totals

833 Mortgage Credit Report Order

844 Product Transfer Account Adjustment

849 Response to Product Transfer Account Adjustment

872 Residential Mortgage Insurance Application

880 Grocery Products Invoice

Another factor is the increased business-to-business payments required. International trade is a fact of life; your suppliers are most likely no longer located on the same region as you are anymore. Being able to pay, and to receive payments quickly, is crucial.

International regulations will drive increased financial EDI adoption, too. NACHA, the electronic payment association, requires payment gateway operators to submit remittance data for payments, making financial EDI a necessity. Financial EDI makes that possible, as information is transmitted seamlessly and quickly to those who need it.

Taxes are one of the certainties in life, and governments need a fast and efficient way to collect them, which is where financial EDI comes into play. The IRS uses the Electronic Federal Tax Payment System (EFTPS), a secure government website that allows users to make federal tax payments electronically. Electronic tax payment on such a massive scale requires a fast and easy way to process those remittances.

The federal government is not the only one who needs financial EDI for taxes; individual states levy taxes, too. Financial EDI allows them to quickly process (and pocket) those payments, so tax money can be allocated for vital programming.

Financial EDI Barriers

Financial EDI is an exciting way to make your business run more smoothly and efficiently. However, there are some barriers to the creation of financial EDI solutions. Some of them are technical, while some are financial. They all have in common, though, that they need to be overcome if you want your business to succeed. Let's take a look at each one of these issues and what you can do about them.

Overcoming technical limitations and platform constraints.

Suppose your organization is interested in adopting financial EDI, and you're trying to figure out how to overcome the technical limitations and platform constraints preventing you from moving forward.

Eliminating system inefficiencies and avoiding new potential problems.

Eliminating system inefficiencies and avoiding new potential problems. Focusing on eliminating system inefficiencies and avoiding new potential problems is necessary for every organization that uses electronic data interchange (EDI) to exchange business documents between companies.

This is especially true when it comes to the healthcare industry, where healthcare providers are not only trying to avoid problems like fraud but also trying their best to provide the most accurate information possible when exchanging documents with each other and with clients.

Building an integration architecture that is scalable, reliable, easy to maintain, and invisible to the end-user.

The first step in building an integration architecture that is scalable, reliable, easy to maintain, and invisible to the end-user is designing the architecture. The type of integration technology you choose will depend on how your financial institutions work together. For instance:

You'll need a gateway that supports those standards if you want to connect with one or more banks using a common standard like SWIFT MT-940 or ISO 20022 message formats. If your bank uses proprietary interfaces or has multiple systems with different functionality (e.g., core banking system and data warehouse), you might need an adaptor—a piece of software that translates messages between two incompatible architectures.

If your bank wants its system updated only once per day (vs. live updates), then maybe it makes sense for them not to have direct access but rather receive nightly snapshots from another system within the same institution (e.g., daily data loads).

Gaining internal buy-in to achieve ROI from the investment in any financial EDI solution.

Most financial institutions do not take the time to define their EDI processes or convert them into use cases (though they should). Instead, they tend to focus on defining requirements in general terms such as "I want my trading partners' documents delivered electronically."

They also fail to define what architecture is required—whether you need an EDI gateway or a simple XML interface between applications. In addition, there is often little consideration given to how the solution will be implemented by IT staff and other departments within the bank; who will own that? Will those individuals have sufficient expertise?

EDI and ACH Both serve as an electronic alternative to traditional paper processes, yet they are more different than they appear on the surface.

ACH is a payment method that allows you to send or receive money from another bank account. ACH transfers are typically used for smaller payments such as utility bills, rent, or mortgage payments.

A financial institution uses the Automated Clearing House (ACH) network to process these transactions between banks and other financial institutions. The network is based on rules created by the National Automated Clearing House Association (NACHA), which was formed in 1972 and consists of approximately 300 participants representing all financial institutions, including banks and credit unions.

EDI is a standard for electronic data interchange. It runs off the common ANSI X12 standard or other standards and uses a transmission protocol called VAN (Value Added Network) or any other communication protocols. EDI is a closed network that allows business partners to send and receive data within their organization but not outside of it. If you want to use EDI with other companies, they'll have to be part of your same network.

EDI is also secure because it uses encryption to ensure that no one else can access your private information. Additionally, since it’s transmitted over a closed network, there's less chance of someone gaining access to your personal information while it's being sent through VAN.

Finally, EDI boasts reliability thanks to its automated system: Transactions are completed through batch processing rather than real-time processing like ACH and ETF do; this prevents any mistakes from occurring during transfers between two parties or companies.

EDI uses the Internet to exchange business documents, while ETF uses FTP servers.

EDI is an Internet-based system that allows companies to exchange business documents. ETF is a subset of EDI and uses FTP servers to exchange business documents. However, there are many differences between the two types of protocols:

One difference between ETF and EDI is that ETF uses XML files while EDI uses all file formats (including XML).

Another difference is that while they both use FTP servers, only ETF utilizes the Internet to send and receive information in real-time.

ACH transactions can be sent through multiple different platforms. The most common methods for sending ACH transactions are via email or a website, but they can also be sent through the proprietary platform of your bank (if you're lucky enough to have one) or via a third-party platform like PayPal or Square.

It's important to note that while these options are all similar in nature and function similarly, they differ in how they collect data from their users and process payments. For example, when you log into your bank account online and click "Pay Someone," this is an example of an ACH transaction being processed through a third-party platform because it happened online.

ACH is a message-based system; EDI is transaction-based. That means that with ACH, you send a message to say, "here's my payment," and then it gets processed in batches asynchronously (meaning not in real-time). With EDI, you send all of your information at once along with your payment request, and then it's processed immediately upon arrival into your bank account or vendor's inbox.

ACH takes more time than EDI because multiple steps are involved in processing payments; those steps require manual intervention and verification after each step has been completed—which can take days.