What are EDI payments and how do they differ from ACH and EFT?

In an increasingly paperless world, electronic payments have become the norm. You may recognize an EDI payment on your company’s bank statement and wonder: what does EDI stand for? Electronic Data Interchange payment transactions have become the industry standard for sending bills of lading, account information, and other payment-related documents because of their built-in security.

It’s easy to confuse EDI transactions with ACH (automated clearing house) or EFT (electronic funds transfer) processes. ACH and EFT describe electronic payment methods, whereas EDI payments denote the secure transfer of documents related to payments rather than payments themselves.

In this article, we explain EDI payments in greater detail, including the different types, how they work, and when to use them. We also discuss how they differ from ACH versus EFT payments, their benefits and drawbacks, and EDI alternatives like virtual credit cards for small businesses.

What is an EDI payment?

EDI stands for Electronic Data Interchange, a method for exchanging business documents between different companies using electronic systems. EDI payments refer to the electronic transmission of payment-related information between businesses using the EDI standard.

It’s worth noting that the term does not refer to money transfers. Instead, it describes the process of securely exchanging sometimes sensitive payment information.

Companies use EDI payments to trade transaction data like:

• Bills of lading
• Purchase order numbers
• Bank account information
• Payer bank account details

EDI payments help exchange this information electronically, eliminating the need for paper-based documents.

EDI payment automation is efficient for international or otherwise complex B2B payments. For example, export-import payments usually involve three parties. EDI payments make sure each stakeholder receives relevant information while maintaining data security.

‍What are examples of EDI payments?

EDIs are closed networks. Only the parties you add to your EDI network can exchange data. A single EDI network can be limited to two parties or contain several. Some common examples of EDI transactions include:

• Student loan guarantees
• credit/debit adjustments
• Debit authorizations
• Payment orders or remittance advice

What are the main types of EDI payments?

Because payment-related information can vary widely, depending on the electronic fund transfer, there are many “types” of EDI payments. However, two of the most common terms you may hear are web EDI and direct EDI/point-to-point payment methods:

• Web EDI: This type uses a standard web browser to process a funds transfer. You can conveniently exchange the payment information using a third-party tool or a hosted web tool. Because of its ease of use, this is often the method for small businesses.
• Direct EDI/Point-to-Point: This is when individual business partners connect directly for payments. Larger businesses that process transactions daily most commonly use this method.

How do EDI payments differ from ACH and EFT?

EDI, ACH, and EFT solutions are often used interchangeably. While all of these methods are electronic, there are some key differences between them.

EDI vs. ACH

EDI is a system for electronically exchanging business documents and payment information using standardized formats. In contrast, ACH payments (sometimes called ACH checks) are electronic bank transfers made through the Automated Clearing House network.

ACH and EDI are sometimes confused because they both include remittance information in EDI format. That said, ACH transactions are a type of electronic fund transfer, while EDI is not a payment type. It’s only the digital language that businesses use to send payment information.

Here are some of the differences between ACH and EDI:

ACH:

• Executed on the ACH network maintained by the nonprofit Nacha
• Not always instantaneous
• Requires manual approval from banks
• Confined to the United States

EDI:

• Executed on private networks maintained by a company or its third-party service provider
• Instantaneous
• Automates common payment processes
• No geographical limits

ACH vs. EFT

EFT (Electronic Funds Transfer) is a broad term for all electronic payment options, while ACH (Automated Clearing House) is a specific type of EFT that moves funds between banks in a batch process.

The types of EFT payments include EDI, ACH, wire transfers, and credit card and debit card payments.‍

EDI vs. EFT

As mentioned above, EFT (Electronic Funds Transfer) is a broad term for all electronic payment options. EDI payments are part of a wider set of electronic data interchange processes, including non-financial and financial data.

Here’s how EDI and EFT processes differ:

EFT:

• Strictly involves the electronic transfer of funds
• Focused on the fund transfer itself, with limited transaction details
• Used for both personal and business financial transactions where the goal is to transfer funds efficiently

EDI:

• Part of a broader set of electronic data interchange processes
• Carry detailed information about the related business transaction along with the payment instructions, facilitating automatic reconciliation
• Commonly used in B2B environments where detailed transaction information alongside payments is crucial

How do EDI payments work?

EDI payments digitize the payment data exchange that traditionally uses paper documents. This is how the process works for a large retailer when placing an order with suppliers:

1. Procurement generates a PO and uploads it to the EDI software
2. EDI software translates information into the secure EDI format and then transmits the PO to the vendor system
3. The vendor receives EDI message and ships the goods
4. The vendor generates an invoice, translates it to the EDI format, and securely sends it to the retailer's AP system

When should you use EDI transactions?

If you routinely send and receive payments from customers and vendors, EDI payments can streamline your accounts receivable and accounts payable processes.

EDI solutions could substantially increase your efficiency by eliminating manual payment processes like mailing invoices.‍

As a B2C business, EDI payments make sense when paying your suppliers. B2B companies benefit by implementing EDI payments with customers and suppliers. Large companies almost always require you to follow EDI payment processes.

Key benefits of EDI payments

Here are five of the benefits of EDI payments.

Stronger business partner relationships

EDI payments simplify the payment lifecycle and lead to stronger business relationships. Manual verification processes can mean lengthy payment timelines and potential delays. If documents get lost or damaged in transit, your suppliers have to wait to receive payment. With EDI payments, you can verify payment request information quickly and clear invoices faster.

The result is lengthy payment timelines and potential delays. If the documents get lost or damaged in transit, your suppliers must wait for payment for a while. Your B2B customers will also appreciate EDI payments because it helps them maintain a standard format for vendor payment information and simplify their ERP uploads.

EDI payments simplify the payment lifecycle and lead to stronger business relationships.

Greater data security

EDI networks are more secure than other protocols, such as ACH (which uses a proprietary network). EDI runs on the ANSI X12 standard and uses the Value Added Network (VAN) transmission protocol. Most importantly, EDI is a closed network. You can control who has access to your network and ensure the right stakeholders receive payment data.

Faster processing times

EDI payments establish a one-to-one relationship between all parties, eliminating the need for batch processing. All transactions clear in real time, speeding up processing times. Communication is almost instantaneous, and you can execute transactions in real-time. More importantly, EDI is a fully automated process compared to other methods.

Cost-effective payments at scale

You can create and automate direct or web EDI payment networks to simplify your payment processes. The result is cutting manual data entry and delays that create opportunity costs. You can also receive funds quickly from your customers, reducing cash application times. This lets you create predictable cash flows cost-effectively.

Increased productivity

EDI payments eliminate tedious manual paperwork in the payment process. Your employees can spend more time identifying causes of cash flow hiccups instead of manually matching documents and mailing them.

Potential challenges with EDI payments

EDI payments are an excellent option for many businesses, but there are a few things to keep in mind when getting set up:

• Infrastructure security: EDI solutions rely on a robust technical infrastructure. So before you exchange information, you need to onboard your business partners onto your closed network and install cybersecurity protocols.
• Staff training: You need to train your staff on EDI software, especially given the sensitivity of the data. Third-party service providers typically offer training programs and ongoing support.
• Costs: Setting up and maintaining an EDI network is costly, especially if you don’t establish the right maintenance processes. It may not make financial sense for some small businesses and can become a spend management issue.
• Data backups: Make sure your payment data is backed up to an off-site location that you can easily access. Review user access rules and make sure only the right roles in your organization have visibility into these datasets.

If you experience these concerns, choose a third-party provider that reduces costs through economies of scale. However, while third-party service providers are an option, consider whether your business needs EDI payments first.

Why virtual cards are a great alternative to EDI payments

EDI payments are an excellent option for securing payment data. However, they make more sense for large businesses that handle several documents during the payment and invoice reconciliation.

Virtual credit cards are a better option if your business sends less complex data, like payee and payer information with invoice and PO details.

Here's how they help:

• Accounting integrations: Once an EDI payment clears, you have to manually import data into your accounting platform. Virtual cards integrate with popular accounting software and automate routine tasks, resulting in quick and accurate monthly closes and deep insights into spending patterns.
• Digitized expense policies: EDI payments automate tasks in invoice approval processes but don’t help you integrate them with your expense policies. For instance, you may incur duplicate spending thanks to employees subscribing to similar apps. Virtual cards help you streamline expense analysis and automate approvals by automating multi-level approval workflows and digitizing your expense policies.
• Increased data security: With virtual cards like Ramp, data is encrypted at rest and in motion using the highest security standards. You also simplify fraud monitoring by creating spend management categories and restrictions, which provide full visibility into your expense payments and precise spending controls.

The bottom line and how Ramp can help

EDI payments are a great way to secure payment data and eliminate manual processes in the payment approval workflow. ‍

Virtual cards may be a better option if your business deals with simple transaction data. Ramp’s virtual cards simplify your expense management and keep your payment data secure.