FINANCIAL EDI

Financial EDI comprises the electronic transmission of payments and remittance information between a
payer, payee, and their respective banks. Financial EDI allows business to replace the labor-intensive
activities associated with issuing, mailing and collecting checks through the banking system with
automated initiation, transmission, and processing of payment instructions. Thus it eliminates the delay
inherent in processing checks.

Financial EDI also improves the certainty of the payment flows between corporate bank accounts
because the payee’s bank can credit its account on the scheduled payment date and the payer’s bank
can debit its account on the same day.

TYPES OF FINANCIAL EDI

Traditionally, wholesale or business-to-business payment is accomplished using checks, EFT and
automated clearinghouses (ACH) for domestic and international funds transfer. ACH provides two basic
services to industrial and financial corporate customers (including other banks):

• Fast transmission of information about their financial balances throughout the world

• The movement of money internationally at rapid speed for settlement of debit/credit balances.

Banks have developed sophisticated cash management systems on the back of these services that
essentially reduce the amount of money companies leave idly floating in low-earning accounts.

BANK CHECKS
Checks are instruments for debit transfers where payees collect funds from payers. Funds made available
by banks to depositors of check are provisional and may be reversed if the payer does not have sufficient
funds in its account to pay the check when it is received by the payer’s bank.

Businesses use check to make payments for two main reasons. First, they are a familiar and readily
accepted form of payment despite some uncertainty about receiving final payment. Second, business
benefits from the float created by the delays in check collection process. Business find float valuable
because they can continue to use or invest funds for several days after they have issued the check.

INTERBANK ELECTRONIC FUNDS TRANSFER (EFT)

An electronic fund transfer (EFT) is an EDI among financial institutions in which money is transferred from one
account to another. Some examples of EFTs include:

• Electronic wire transfers

• Automatic teller machine(ATM) transactions
• Direct deposit of payroll
• Business to business payments
• Federal, state and local tax payments
From long time remittance of funds within the banks i.e. from one branch to another was completed through
transfer payment orders, telegraphic

transfers or by drafts, which takes considerable time to reach destination.

To avoid this delay a new system called " The Inter-Bank Electronic Fund Transfer System" which may be
referred as "EFT System" under the guidance of Reserve Bank Of India has been introduced.

In this system remittance can easily be made from any of the branches of participating Bank at designated centre
to any other branch of the same or any other participating bank at the same or any other designated centre which
would facilitate remittance to reach destination on the same day, almost instantaneously itself through the
system of computer and communication networks.

RBI EFT is a Scheme introduced by Reserve Bank of India (RBI) to help banks offering their customers money
transfer service from account to account of any bank branch to any other bank branch in places where EFT
services are offered.

The EFT system presently covers all the branches of the 27 public sector banks and 55 scheduled commercial
banks at the 15 centres. Funds transfer is possible from any branch of these banks at these centres to other
branch of any bank at these centres both inter-city and intra-city.

Operation procedure of RBI EFT system

Step-1: The remitter fills in the EFT Application form giving the particulars of the beneficiary (city, bank, branch,
beneficiary’s name, account type and account number) and authorizes the branch to remit a specified amount to
the beneficiary by raising a debit to the remitter’s account.

Step-2: The remitting branch prepares a schedule and sends the duplicate of the EFT application form to its
Service branch for EFT data preparation. If the branch is equipped with a computer system, data preparation can
be done at the branch level in the specified format.

Step-3: The Service branch prepares the EFT data file by using a software package supplied by RBI and
transmits the same to the local RBI (National Clearing Cell) to be included for the settlement.

Step-4: The RBI at the remitting centre consolidates the files received from all banks, sorts the transactions city-
wise and prepares vouchers for debiting the remitting banks on Day-1 itself. City-wise files are transmitted to the
RBI offices at the respective destination centres.

Step-5: RBI at the destination centre receives the files from the originating centres, consolidates them and sorts
them bank-wise. Thereafter, bank-wise remittance data files are transmitted to banks on Day 1 itself. Bank-wise
vouchers are prepared for crediting the receiving banks’ accounts the same day or next day.

Step-6: On Day 1/2 morning the receiving banks at the destination centres process the remittance files
transmitted by RBI and forward credit reports to the destination branches for crediting the beneficiaries’ accounts.

RBI EFT system is an improvement over existing facilities like demand drafts and telegraphic transfers.

The demand draft facility is paper based. The remitter, after purchasing demand draft from a bank branch,
dispatches the same by post/courier to the beneficiary. The beneficiary, in turn, lodges the draft to his/her bank
for collection and clearing. The time taken for completing the process is about 10 days.

In the case of telegraphic transfer, fund reaches the beneficiary either on the same day or the next; but both the
remitter and the beneficiary would have to be account holders of the same bank. If they are customers of different
banks, a good deal of paper processing is required.

On the other hand, RBI EFT system is an inter-bank oriented system. RBI acts as an intermediary between the
remitting bank and the receiving bank and effects inter-bank funds transfer. The customers of banks can request
their respective branches to remit funds to the designated customers irrespective of bank affiliation of the
beneficiary.

The receiving branch acknowledges every transaction it receives after crediting the beneficiary’s account. The
acknowledgment particulars reach the remitting branch as an inward message on Day 3 of the EFT processing
cycle. The remitting branch will, therefore, have precise information as to when the beneficiary’s account was
credited

AUTOMATED CLEARINGHOUSE (ACH) TRANSFERS

In contrast to the EFT process, ACH transfers are used to process high volume of relatively small-dollar payments
for settlement in one or two business days. An ACH provides the following services: preauthorized credits, such
as the direct deposit of payrolls; preauthorized debits, such as repetitive bill payments and consumer-initiated
payments (called GIRO in banking circles). This is primarily a high-volume/low-dollar, consumer-oriented product.

To provide these and other services, banks not only have set up their own systems but also have shared ACH
systems with other banks. Two types of ACH systems are used:

• Credits transfers
• Debit transfers

Credit transfers are similar to large-dollar funds transfers in that funds flow directly from the payers bank
to the payee’s. The funds received by the payee’s bank are generally provisional until the morning of the
business day following the settlement. The reserve bank may revoke payment if the sending bank does
not have sufficient funds in its account to fund them on the settlement day. When ACH debit transfers are
used, the payee’s bank initiates the transfer and receives funds immediately from the payer’s. As with
checks, funds made available to cover the transfer on the scheduled settlement day.

Use of ACH for business to business payments is growing rapidly. Business typically use ACH credit
transfers to pay for goods or services and to make tax payments to state and local governments. They
use ACH debit transfers to concentrate funds from the bank accounts of widely dispersed affiliates and
subsidiaries to the company’s primary bank account. Some business also use ACH debit transfers to
collect funds from business that distribute their products. Firms are concerned about permitting other
companies to initiate debits on their accounts as this eliminates float. Thus ACH debit transfers are used
less often than credit transfers for business-to-business payments.

How financial EDI payments are made

Corporation use various approaches when implementation financial EDI. The most fundamental decision
a business must make is whether payment instructions and remittance data should flow together through
the banking system or whether payment instructions should flow through the banking system while
remittance data are transmitted over a direct data communications link with a trading partner or over a
 value-added network (VAN).

VAN’s facilitate the exchange of electronic data by accepting data in a variety of formats and by
converting the incoming data to a format usable by the receiver of the information. VANs also manage
transmission schedules and hold data until receivers are ready to accept them.

The choices business make are based on differences in electronic transmission costs, the extent to which
the two trading partners are able to exchange business documents electronically, and the types of
electronic payment services offered by their banks.

FINANCIAL EDI STANDARDS

The difficulty of handling various electronic payment and remittance formats for financial EDI has proven to be
one of the biggest barriers to its widespread acceptance. Some standards exit just for sending remittance
information others, just for transferring funds. Fortunately, new standards are emerging for moving
information about financial instruments and data together.

To permit business to automate payment processing fully, the banking industry has combined electronic
payment formats with EDI for remittance data. Following are among the most used formats in industry today:

• BAI: Developed by bank administration institute. These proprietary standards have been used by US
banks for sending and receiving invoice and remittance information for several decades.
• 820 and 823: In 1980s, ANSI,whose standards apply to most regular EDI transaction in US, created
the ANSI X12 820 and 823 formats for payment orders and remittance advise.
• CTP: the corporate trade payment format overcame the 94-character restriction of standard ACH
transfers by accommodating remittance information in additional predefined 94-character block.

Despite technological progress, it must be made clear that the development and adoption of universal EDI
formats take many years.
Five key benefits of Electronic Data Interchange (EDI)
The benefit of electronic trading is well documented. Here are the top five reasons why businesses adopt EDI.

Benefit One: Remove document re-keying

By removing the manual keying of key business documents such as Orders, Invoices, Acknowledgments and
Despatch Notes your company can benefit significantly by::

• Reduced labour costs

• Elimination of human keying errors
• Faster document processing
• Instant document retrieval
• Remove reliance on the postal service

Benefit Two: Eliminate Paper

Paper-based trading relationships have some inherent disadvantages when compared with their electronic trading
equivalents:

• Stationery and printer consumable costs

• Document storage costs
• Lost documents
• Postage costs

Benefit Three: Reduce lead times and stockholding

• Electronic trading documents can be delivered far more quickly than their paper counterparts, thus the
turnaround time from order to delivery can be reduced.
• By using EDI for forecasting and planning, companies are able to get forward warning of likely orders and
to plan their production and stock levels accordingly.
• Companies receiving advanced shipping notes or acknowledgments know in advance what is actually
going to be delivered, and are made aware of shortages so alternate supplies can be sourced.
• Integrating electronic documents means they can be processed much faster, again reducing lead times
and speeding up payments.

Benefit Four: Increase quality of the trading relationship

 • Electronic trading documents when printed are much easier to read than copies faxed or generated on
multi-part stationery by impact printers.
• Accurate documents help ensure accurate supplies.
• Batches of electronic documents are usually sequentially numbered, therefore missing documents can
easily be identified, not causing companies to wade through piles of paper.

Benefit Five: Competitive Edge

Because electronic data interchange (EDI) makes you attractive to deal with from your customers' point of view,
and you are in their eyes cheaper and more efficient to deal with than a competitor trading on paper, your costs
will be lower because you will require less manpower to process orders, deliveries or payments.

It is no accident that the leading UK retailers all rely on EDI for placing orders and receiving invoices - they know
the benefits they get and the costs that can be saved.
 EDI IN ACTION
EDI takes a manually prepared form or a form from a business application, translates that data into electronic
format, and transmits it. When the data is received it is ‘untranslated’ into a format that can be read by the
receipient’s application. Hence output from one application become input for another through the computer to
computer exchange of information. This results in elimination of errors and delays in paper based transactions.

Benefits of EDI can be seen by comparing the flow of information between organizations before and after its
implementation. The flow of information when paper documents are shuffled in between organizations via the
mailroom. When the buyer sends a purchase order to a seller, the relevant data must be extracted from the
internal database and recorded on the hard copy. This hard copy is then forwarded to the seller after passing
through several intermediate steps. Seller receives information in the form of letters. This information is manually
entered into information systems of the recipient by data entry operators. This process generates a considerable
amount of overhead in labor costs and time delays. The reproduction of information also increases the risk of
errors cause by incorrect data entries.

The EDI transactions for a purchase, shipment and corresponding payment are as follows:

1. Buyer’s computer sends purchase order to seller’s computer.

2. Seller’s computer sends purchase order confirmation to buyer’s computer.
3. Seller’s computer sends booking request to transport company’s computer
4. Transport company’s computer sends booking confirmation to seller’s computer.
5. Seller’s computer sends advance ship notice to buyer’s computer.
6. Transport company’s computer sends status to seller’s computer.
7. Buyer’s computer sends receipt advice to seller’s computer.
8. Seller’s computer sends invoice to buyer’s computer.
9. Buyer’s computer sends payment to seller’s computer.

The purchase order confirmation is the seller’s acceptance of the price and terms of sale.all the
interactions occur through EDI forms and in most cases are generated automatically by the computer.
 HISTORY OF EDI

In the middle of 1960, different organizations such as airlines, shipping and railroad companies, and retail
industries realized that, as fast processing of information is fundamental in order to remain competitive in
the business world, large volumes of paper and expensive communication means should be minimized, in
order to avoid delays, inconsistencies and high costs in business operations, and a new way to achieve
this had to be found.

The Transport Data Coordinating Committee (TDCC) then developed a standard focusing on the
content of the message, rather than the method of its transmission, via the use of transaction sets. A
transaction set (corresponding to business forms) defines messages; and is composed of structured data
segments. These data segments specify the distinct order of data elements such as price, model number,
carrier code, etc. Each of these data elements has a particular location within a data segment. The
transportation and food industries adopted this standard.

In 1979, the American National Standards Institute (ANSI) authorized a committee called the Accredited
Standards Committee (ASC) X-12 (consists of government, transportation, and computer manufacturers)
to develop a standard between trading partners based on the TDCC structure. The standard was called
‘The United States Electronic Data Interchange (EDI)’ ANSI X-12. Though ANSI X-12 answered the
needs of organizations for electronic data interchange, still a standard structure of message types for
each trading partner was needed.

In 1986, organizations from different sectors developed an internationally approved standard structure for
transmitting information between different trading partners, called the United Nations Electronic Data
Interchange for Administration, Commerce, and Transport (UN/EDIFACT).
ANSI X-12 and UN/EDIFACT were the first EDI standards, and for many years the two co-existed. A huge
number of companies now use one or both of these EDI standards. However, there are now a number of
other EDI standards like USC (Uniform Communication Standard) for food industries, WINS (Warehouse
Information Network Standard) for public warehouses, and others.