Learn How Payment EDI Systems Work for Businesses

What EDI Payment Systems Are and Why Businesses Use Them

EDI stands for Electronic Data Interchange. It is a standardized way for businesses to send payment and ordering information to each other using computers instead of paper documents. Rather than printing invoices, purchase orders, and payment notices, companies use EDI to transmit this data electronically in a structured format that both the sender and receiver can read and process automatically.

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The concept of EDI became popular in the 1970s and 1980s as computers became more common in business. Before EDI, companies would mail physical documents, which took days or weeks to arrive and required manual data entry. A typical invoicing process might involve printing hundreds of pages, organizing them by hand, and then re-entering all that information into another company's accounting system. This was slow, expensive, and prone to errors.

Today, EDI is used across many industries. Retail companies use it to manage inventory and process supplier payments. Healthcare organizations use EDI to handle insurance claims and payments. Manufacturing companies use it to coordinate with parts suppliers. Financial institutions use EDI to process bank transactions and wire transfers. According to industry surveys, over 80% of Fortune 500 companies use some form of EDI, and it processes trillions of dollars in transactions annually.

Businesses choose EDI systems for several practical reasons. First, EDI reduces manual work. When data flows automatically from one system to another, employees do not need to type in information by hand. Second, it speeds up transactions. Electronic transmission is nearly instant, compared to mail delivery taking several days. Third, it reduces errors. Automated systems are less likely to misread numbers or dates than humans manually copying data. Fourth, EDI creates a clear record of all transactions that both parties can verify.

Takeaway: EDI is a computerized method that replaces paper documents with structured electronic data, allowing businesses to exchange payment and ordering information quickly and with fewer errors.

How EDI Payment Systems Transmit Information Between Companies

EDI payment data moves through several layers of technology. Understanding these layers helps explain how information gets from one company to another safely and accurately. The process starts with data creation in one company's accounting or ordering system. That system formats the information according to an EDI standard—a set of rules about how to structure data so that any system following those same rules can read it.

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The most common EDI standard in North America is called X12, developed and maintained by an organization called ASC X12. Another widely used standard is called EDIFACT, which is more common internationally. These standards define exactly how to format things like invoice numbers, dates, amounts, and company identification codes. For example, the X12 standard specifies that a date must be written in a particular format so that different companies' computers will interpret "20240115" the same way—as January 15, 2024—rather than some systems reading it as the 15th day of the first month and others reading it differently.

Once data is formatted according to these standards, it must travel from one company's computer system to another. Several transportation methods exist. Many companies use a Value Added Network (VAN), which acts as a middleman or mail carrier for EDI data. A company sends its EDI file to the VAN, which stores it and makes it available for the receiving company to retrieve. This approach is reliable because the VAN maintains records of all transactions and confirms delivery. Other companies use direct point-to-point connections, where one company's system connects directly to another's through the internet using secure protocols like SFTP (SSH File Transfer Protocol) or AS2 (Applicability Statement 2). Some modern businesses now use cloud-based EDI solutions that handle data transmission automatically.

The receiving company's system then processes the incoming data. If the format matches the expected EDI standard, the receiving system can automatically extract the key information—the amount being paid, the invoice number, the date, and so on—and feed it directly into the company's accounting software. Modern EDI systems often use acknowledgment messages to confirm that data was received and processed correctly. If something goes wrong, the system generates an error report that alerts the appropriate person.

Takeaway: EDI payment data moves through standardized formats (like X12 or EDIFACT), travels via VANs or direct secure connections, and is automatically processed by the receiving company's system.

Common EDI Payment Transaction Types and Real-World Examples

Several standard EDI transaction types handle different stages of the payment process. Each transaction type has a specific purpose and structure. Learning about common types shows how EDI works across different business scenarios.

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The Purchase Order (EDI 850) is one of the most frequently used EDI transactions. A retailer like a grocery store chain sends an 850 to a supplier when it wants to order products. The 850 includes details like product codes, quantities needed, requested delivery dates, and shipping instructions. Instead of one store manager calling a supplier and reading off an order, the retailer's system automatically generates an 850 and sends it to the supplier's system. The supplier's system receives it, checks inventory, and processes the order without human intervention. A company might send hundreds of purchase orders daily through EDI.

The Invoice (EDI 810) is sent by the supplier to the buyer after goods are shipped. The 810 contains information about what was delivered, the price per unit, any discounts, taxes, and the total amount owed. This differs from the purchase order because it confirms what was actually sent, not just what was ordered. If a retailer ordered 100 boxes but the supplier only had 85 in stock, the invoice reflects the 85 that were actually shipped.

The Payment Order (EDI 820) is the transaction that actually moves money. This is the EDI transaction most directly related to payments. An 820 contains bank account information, the amount being transferred, and which invoice it is paying for. A manufacturing company receiving an 810 invoice for $50,000 from a parts supplier will generate an 820 that tells its bank to transfer $50,000 to the supplier's account. The supplier receives notification of the incoming payment through EDI before the money even arrives.

The Advance Ship Notice (EDI 856) is sent by the supplier before goods arrive to notify the buyer that shipment is on the way. It includes tracking information and details about what is in the shipment. This allows the buyer to prepare receiving areas and verify that the correct order is arriving.

For example, consider how a large automotive manufacturer might use these together: The manufacturer's system sends an 850 purchase order to a brake pad supplier for 10,000 units. The supplier's system receives it and begins production. When the brakes are ready, the supplier sends an 856 advance ship notice with tracking information. When the truck leaves the supplier's warehouse, it sends another 856 with the actual tracking number. When goods arrive at the manufacturer's facility, the manufacturer's receiving system scans the shipment and compares it to the 856 to ensure accuracy. The supplier then sends an 810 invoice for the $200,000 sale. The manufacturer's system automatically matches the invoice to the original purchase order to verify the price is correct. Once verified, the manufacturer's accounting system generates an 820 payment order that instructs its bank to pay the supplier. The supplier's bank receives the payment and deposits it automatically.

Takeaway: Common EDI payment transactions include purchase orders (850), invoices (810), payment orders (820), and advance ship notices (856), each serving a specific purpose in the order-to-payment cycle.

The Technical Requirements and Standards for EDI Implementation

Setting up an EDI payment system requires both technical infrastructure and agreement on standards. A business does not need to be highly technical to use EDI, but someone in the organization needs to understand what is involved.

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First, a company needs accounting or enterprise software that supports EDI. Most medium to large accounting systems—like SAP, Oracle, Microsoft Dynamics, or specialized accounting software—include built-in EDI capabilities. Smaller companies might use EDI modules that connect to their existing accounting software or work with third-party EDI service providers. The software must be able to create payment data in the correct format and read incoming EDI files.

Second, a company needs a way to send and receive EDI files. As mentioned earlier, this can be through a Value Added Network, a direct secure connection, or a cloud EDI platform. The choice depends on the company's existing technology, the volume of transactions, and the companies they work with. If a company only needs to send EDI payments to one major customer, a direct connection might work. If it deals