In the business world, the terms electronic data interchange (EDI), automated clearing house (ACH), and electronic funds transfer (EFT) are sometimes mistakenly used interchangeably. This can even happen among finance or business professionals with many years of experience under their belts.
While these terms might sound similar or even perform similar functions, each one has a distinct definition from the other and has its own legal impact. Here’s what you need to know on the differences between EDI, ACH, and EFT, the types of EDI payments you can use, and how they can be used in your business.
Many businesses deal with sensitive data, and using paper to track that information can lead to challenges such as security issues, mistakes, and much slower communication rates. Electronic data interchange, or EDI, can be a much more secure alternative to managing such information as it can be encrypted and may be more easily managed than tracking a stack of documents.
EDI is meant for exchanges of information between computers or other technology devices, and can be used when it comes to a business's accounting functions. When it comes to business, EDI can be utilized to manage and configure payments. According to NACHA, “In the payments world, EDI can be used to format invoice and remittance information.”
Here are a few types of documents that can be used and managed with EDI:
EDI can offer businesses a streamlined accounting process as well as a means of convenience as EDI payments are processed quickly. EDI also allows for businesses to utilize accounting software or even outsource their accounting processes to free up more time and money.
ACH, or automated clearing house payments, on the other hand, refers to the electronic transfer of funds. EDI, unlike ACH and EFT, is not a type of payment. This is managed by the National Automated Clearing House Association (NACHA). ACH, which is referred to as the ACH Network by NACHA, can be used for things such as paying invoices, business-to-business (B2B) transactions, direct deposit, and payroll for your employees.
ACH is an extremely common approach to payments, and seems to only be growing in its popularity. According to a 2019 notice by NACHA, the use of ACH transactions had expanded by more than one billion for the previous five years. That same year, there were 24.7 billion ACH payments which totaled $55.8 trillion.
ACH’s popularity may be due to the fact that it can make payments extremely fast and easy. The convenience of paying or getting paid quickly can be an attractive option for many businesses.
Like ACH, EFT, also referred to as electronic funds transfer, is a form of payment. EFT umbrellas just about all electronic payments, such as wiring money to a vendor or paying a bill with a credit or debit card. ACH payments are also a form of EFT payments; however, not all EFT payments are ACH payments. As stated previously, EDI differs from EFT and ACH in that it is not a form of payment.
EFT is also sometimes called Regulation E, or the Electronic Funds Transfer Act. This legislative policy outlines both consumer rights and financial institutions’ responsibilities when it comes to the electronic transfer of funds, according to NACHA. The Consumer Financial Protection Bureau regulates this policy.
There are several types of EDI payments that a business can use, the most common of which are web EDI and direct EDI/point-to-point payments. Here’s what those terms mean and how they can fit with a business’s transactions.
Web EDI: As the name implies, this type of EDI payment utilizes Internet browsers to process payments. Some businesses set up online platforms to exchange financial information so businesses or consumers can pay their invoices. In the business world, this type of approach may be best suited for businesses that only need to use this form of payment sporadically, such as small or medium businesses.
Direct EDI/Point-to-Point: Unlike with web EDI, direct EDI (or point-to-point) payments require business partners to directly connect with each other for payment. It's a way for all parties to have some form of control over transactions. This approach is best for bigger businesses that deal with many payments and transactions on a daily basis.
Using EDI payments can make an impact on both a business’s finances and use of time. Using EDI to manage accounts payable and accounts receivable can cut back on extraneous paperwork, tracking mountains of physical documents, as well as unnecessary accounting tasks. This time could instead be spent on other aspects of your business, including higher-level projects that could make your company more profitable.
EDI payments can also help companies cut back on spending money on things such as postage, late fees, and accounting errors as EDI technology may help you avoid common mistakes brought on by human error. These funds can then be funneled into other areas of your business. As a result, this may improve your relationships with other companies you do business with as well as it may help clear up confusion and help your business make payments on time.
While it may be confusing as some of the terms are similar in nature, understanding the differences between EDI, ACH, and EFT payments is an important aspect of running a business as it may impact your company in a financial and legal sense, for example, as with contracts.
When it comes to making or receiving payments for your business, EDI payments can help to streamline your accounting process, making life a little simpler for everyone involved. Before choosing an EDI payment approach, be sure to research the various approaches to see what might be the most appropriate for your company, which may depend largely on the size of your business.
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