FINANCIAL EDI CHANGING THE CASH MANAGEMENT BUSINESS
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. Unlike other forms of EDI, such as exchange of price quotes or purchase orders, financial EDI always involves a bank because a financial transaction (a payment) is being effected. Due to this fact, a new business opportunity now exists for banks in the cash management industry.
Who Uses Financial EDI?
In the most general sense, the marketplace for financial EDI consists of two distinct segments.
o Originators – companies or government agencies who electronically initiate payments and the associated remittance information to their suppliers using the standard EDI format.
o Receivers – companies and government agencies who electronically receive payments and the related remittance information using the standard EDI format.
In financial EDI, a bank acts as the financial intermediary between originators and receivers for both the actual payment and the associated payment data.
How Does Financial EDI Work?
In the classic EDI scenario, the following actions take place:
o The buyer, or originator, electronically extracts payment information from the company’s accounts payable system,
o Formats the data into an EDI standard (ANSI 820 transaction set),
o Transmits an ANSI 820 file to the company’s bank,
o The bank then takes the 820 data and puts it into the format necessary for it to be carried through the Automated Clearinghouse Network as an ACH transaction,
o The ACH network then delivers the payment and data to the seller’s bank. The bank credits the seller and,
o Electronically transmits the payment-related information in the 820 format to the seller’s accounts receivable system where the payment is then posted automatically.
Benefits of Financial EDI?
By using financial EDI, all the steps described above are done electronically with the payment and related information exchanged from one computer system to another, with no manual intervention. Today, of course, most payments are made by check with a hard copy of remittance information attached. The manual processing which results by using paper is less efficient, less accurate, and most importantly, more expensive than electronic processing. This is why financial EDI is a rapidly growing way of doing business.
Benefits of Financial EDI for Banks
For banks in the cash management industry, offering financial EDI services is one way to defend the revenue generated by current check business, whether it is in disbursements or collections, since over time, a great many of these payments will be converted to electronic EDI transactions. However, because of the investment required, not every cash management bank will be an EDI player. Electronic processing. This is why financial EDI is a rapidly growing way of doing business.
Over the last several months we have been stressing supply chain collaboration. You know what I mean: sharing data with customers and vendors; acting like a virtual extended enterprise; C-SCM Community Supply Chain Management. Well this week I saw what I regard as a real move towards increased collaboration when Norfolk Southern Corp. joined the nonprofit, member-supported Automotive Industry Action Group (AIAG).
Both groups treated this move as important with statements from high-ranking officers.
“The rebound in the automotive industry has created new challenges for logistics management, and Norfolk Southern Corp.’s expertise in intermodal transportation will be beneficial to AIAG’s membership at a key time,” said AIAG Executive Director J. Scot Sharland in a prepared statement.
The AIAG membership will give the railroad’s managers a “deeper understanding of our automotive customers’ needs and afford us an opportunity to be an industry leader in contributing ideas and solutions to complex logistics issues,” said NS Group Vice President-Automotive Richard Kiley.