Benefits of Electronic Data Interchange For the Financial Sector

#Article
#Software Development
#FinTech
April 28, 2020 8 min read

The Global Banking Fraud Survey in 2019 revealed that modern financial institutions (FIs) face numerous challenges such as cyberattacks, data breaches, faster payments, and evolving digital channels. The latter ones are continuously disrupting the healthy functioning of the financial firms and, therefore, negatively influence customer satisfaction, leading to an inevitable drop in revenues.

There is an urgent need for faster and more secure payments, and today’s highly globalized world offers the technology of financial electronic data interchange (EDI). Financial Electronic Data Interchange allows for seamless transmission of payments, which not only fuels the global economy but enables governments to collect and distribute tax money as well.

Banks Challenges

Cyber related fraud risk is the most significant challenge faced by FIs in all three regions: America, Europa/Middle East/Africa and in the Asia Pacific. In fact, the top 5 fraud risks are in connection with the digital transformation that the world is going through. Basically, financial institutions need to understand the digital transformation is happening rapidly all around us, appreciate the evolving fraud risks arising from this rapid change, and design a fraud risk management that is able to minimize these risks in a sustainable, effective and efficient manner.
Lem Chin Kok,
Forensic Lead, Asia Pacific, KPMG in Singapore

Overview of Financial EDI

Traditional EDI incorporates the electronic transfer of information in a standardized, machine-readable format. Likewise, financial EDI is the electronic transfer of payments, payment-related data, or other financial documents in the same format as well.

Financial EDI

Financial entities use EDI to transmit payments to one another and governments rely upon financial EDI to transfer tax payments. Financial EDI powers today’s globalized economy; without this technology, the transfer of the transactions on a massive scale would be slow and labor-intensive.

This is one of the reasons why the proportion of products and services delivered by banks through digital channels is increasing. The World Payments Report 2018 forecasted that non-cash transactions will grow compound by 12.7% to 2021.

How Financial EDI Works

There are a few steps that a firm or institution undertakes to send a payment using financial EDI. The buyer digitally extracts payment data from the company’s accounts payable system. That information is converted into an EDI standard format. Then, the transaction set is transferred to the organization’s bank.

Following that, the bank transforms that information into the format required for its transfer via the Automated Clearing House (ACH) Network as an ACH transaction. This network moves the payment and it’s associated data to the seller’s bank, with the bank crediting the seller. It automatically sends the payment information to the seller’s accounts receivable system, where the seller sees the funds have been posted.

Benefits of Electronic Data Interchange for Financial Sector

The financial services industry is no stranger to complexity. Banks provide a wide array of services to their customers. Customers, services, and processes generate a great deal of information.

By applying EDI to your financial organization, you can facilitate many processes in your company with automatic information processing, reduce administrative duties, and eliminate data entry errors. The benefits of Electronic Data Interchange for the end-to-end transactions use for the business lifecycle results in better time and resource management. Below are well-known benefits of using EDI:

Automated Processes. Financial EDI automates a lot of processes in the financial sector. Thanks to financial EDI, FIs can electronically receive invoices and initiate payments. For major organizations, that ability saves time, money, and paper, both for the buyer and the seller.

Getting paid faster. Apart from saving time, money, and paper, automation empowers companies to get paid faster. It takes less time to get money electronically than it does by check. As a result, companies can streamline their cash conversion cycles.

Cost Reduction. Additionally, financial EDI gives a lower-cost alternative to paper-based payment methods. It can be expensive to process checks by humans. Financial EDI requires minimal human involvement. As you know, human errors are expensive, and by removing the need for human intervention, FIs save money.

Enhanced Corporate Productivity. Financial EDI allows more businesses to take on more operations with a fewer human involved. With EDI technology, the whole process can be done in a matter of seconds due to the automated process that allows for prompt fulfillment of tasks like registering and balancing validation.

Enhanced Financial Ratios. With the implementation of EDI, transferring, and getting e-invoices appears to be almost instant. EDI also offers automatic authentication and checking procedures, which enable speedy dispensation at the endpoint, helping estimate cash necessities. And while customers can take advantage of quick payment rebates, the dealer grows its liquidness.

Supporting Green Ideas. The transition from paper-based services to the use of electronic transactions and invoices based on EDI lowers CO2 emissions. Thus, the use of EDI encourages corporate social accountability and helps FIs achieve green supply chain management.

Advanced Accuracy. Electronic Data Interchange considerably improves your data quality and removes the problem of re-working requests by bringing at least a 30% to 40% reduction in transaction errors. The use of ethics acknowledged by both parties (receiver and sender) guarantee correct interpretation of data, irrespective of activity sectors, or nationalities.

Enhanced Security. EDI raises the level of protection for any transactions by securely allocation data across a more extensive variation of communicating protocols and safety standards, therefore, reducing fraud risks. Your partners would profit from the seamless movement of data and accessibility to the technology creates prospects for newer business breaks.

Better Customer and Partner Services. Despite having plenty of benefits, there are some barriers in implementing this technology, such as complexity, cost, and limited support in the banking system.

Financial Electronic Data Interchange benefits

Notwithstanding all these benefits, the process of integrating EDI into your business may be tricky. Be prepared to face some barriers such as complexity and cost, lack of trading partners using EDI, poor support from the bank site, and specified complexity of standards.

Use Cases: How Financial EDI Streamlines Processes

The section above illustrates how organizations can benefit from Electronic Data Interchange. However, without examples, understanding how financial EDI benefits companies can be hard to imagine. Below, we give some familiar examples of financial EDI transaction codes:

  • EDI 139 Student Loan Guarantee Result. It’s the transaction set for Student Loan Guarantee Result and informs a lender or school on the status of a loan guarantee.
  • EDI 144 Student Loan Transfer and Status Verification. It’s the transaction set for lenders and guarantors to send or receive information about transmitting student loan ownership.
  • EDI 154 Secured Interest Filing. It’s a very common transaction across the US, usually set to file Uniform Commercial Code (UCC) financing statement forms, liens, judgments, and other secure statements of secured interest or exchange secured interest filing information. 
  • EDI 812 Credit/Debit Adjustment. As an alternative to sending a credit or debit memo, EDI 812 works as a multi-directional notice to trading partners to inform about changes and bill backs.
  • EDI 820 Payment Order/Remittance Advice. This transaction has two goals: to inform trading partners about intent to pay an invoice and to order a financial organization to pay a seller.
  • EDI 821 Financial Information Reporting. EDI 821 records balances, detail and summary financial transactions, and other associated financial account information.
  • EDI 823 Lockbox. This transaction is the digital version of a paper lockbox. It transfers incoming payment data and totals from a bank or any other lockbox service provider to a lockbox owner.
  • EDI 827 Financial Return Notice. Sometimes, the originating financial institution cannot process the transaction. EDI 827 notifies the originator that the 820 transaction doesn’t go through.
  • EDI 828 Debit Authorization. Payers use this transaction to inform a financial institution about authorized debits, and it is often used along with ACH and EFT payments.
  • EDI 829 Payment Cancellation. Payers use EDI 829 to cancel a previously authorized electronic payment from a financial institution before money being released.

Financial EDI Gains Popularity by Improving Other Sectors

A few factors are driving the adoption of financial Electronic Data Interchange: healthcare payment requirements, increased B2B payments needed, international payment regulations, and governmental tax payment regulations.

Financial IDE factors

Healthcare payments drive the adoption of financial EDI. HIPAA approves using EDI in healthcare so that processes are more efficient. There are financial EDI transactions uniquely designed for the healthcare industry: 835 for submitting payments, 820 for salary deductions, and 837 for providing claim information.

Another factor is the increased B2B payments required. International trade is a normal thing that’s why your suppliers are most likely located on the other continents. The ability to pay, and to receive payments quickly, is crucial.

International regulations foster financial EDI adoption, too. NACHA, the electronic payment organization, requires payment gateway operators to provide remittance data for payments, making financial EDI a necessity. Financial EDI makes that possible, as data is transmitted hassle-free and quickly.

Governments need a fast and effective way to collect taxes, which is where financial EDI is also helpful. The IRS uses the Electronic Federal Tax Payment System (EFTPS), a secure government website that allows users to pay federal taxes electronically. Such electronic tax payment on a massive scale needs a fast and straightforward way to process those remittances.

Summary

More and more organizations and governments are using financial Electronic Data Interchange to transmit payments and they do it reasonably. They realize that it is the most reliable way to complete those processes because EDI solution automates payment transmission, allows for timely payments receiving, and ensures all the data is accurate.

When you need to share financial information within your B2B ecosystem, Innovecs can offer a modern solution for secure data sharing. Our consulting and integration specialists can develop a financial Electronic Data Interchange solution tailored to your business needs. The products we create help to seamlessly collaborate with business partners, transfer data, and integrate internal business processes.

 

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