Electronic data interchange (EDI), or electronic data processing, is the electronic transmission of data between computers in a standard, structured format. Electronic funds transfer (EFT) is the term used for electronic data interchanges that involve the transfer of funds between financial institutions.

EDI has allowed companies to process routine business transactions, such as orders and invoices, more rapidly, accurately and efficiently than they could through conventional methods of transmission. While EDI has been around for decades, it wasn't until the late 1990s that this basic principle became a driving force in the rollout of electronic commerce, corporate extranets linking suppliers and customers, and related network-based technologies.


EDI has been present in the United States in some form since the mid-1960s. Businesses had been trying to resolve the difficulties intrinsic to paper-dependent commercial transactions. These difficulties include transmission speed (because of delays in entering the data onto paper and transporting the paper from sender to receiver); accuracy (because the data had to be recreated with each paper entry); and labor costs (labor-based methods of transmitting data are more expensive than computer-based methods).

In 1968 a group of railroad companies concerned with the accuracy and speed of intercompany transportation data transmissions formed an organization called the Transportation Data Coordinating Committee (TDCC) to study the problem and recommend solutions. Large companies such as General Motors and Kmart also reviewed the problems, which arose when they used their intracompany proprietary formats to send electronic data transmissions to outside parties. Because each company had its own proprietary format, there was no common standard among transmitting parties. A company doing business electronically with three other companies would need three different formats, one for each company.

By the 1970s several industries had developed common EDI programs for their companies within those industries, and a third-party network often administered these systems. Some examples of these systems include ORDERNET, which was developed for the pharmaceutical industry, and IVANS, which was developed for the property and casualty insurance industry. While these systems were standardized for each industry, they likewise could not communicate with other industries' proprietary systems. By 1973 the TDCC began developing set of standards for generic formats to handle this problem.


EDI is quite different from other types of electronic communication. It is unlike a facsimile transmission (fax), which is the transfer of completely unstructured data through a digitized image. EDI also differs from other types of electronic communications among computers, such as electronic mail, network file sharing, or downloading information through a modem. In order to access electronic mail messages, shared network files, or downloaded information, the format of the computer applications of both the sender and the receiver must agree.

Since EDI uses a defined set of standards for transmitting business information, these standards allow data to be interpreted correctly, independent of the platforms used on the computers that transmit the data. When a sender transmits data, such as a purchase order, the EDI translation software converts the proprietary format of the sender's document processing software into a mutually recognized standard format. When the receiver obtains the data, the EDI translation software automatically converts the standard format into the receiver's proprietary document processing format. Because of the speed and accuracy of an EDI, users find that the system saves time and reduces costs over paper-based business transactions.


By the 2005, major retailers relied heavily on EDI to exchange purchase orders, invoices, and other information with their trading partners. In a June 2004 poll of 20 retailers, the majority said that they were either adding new trading partners or increasing the number of EDI transactions. It is estimated that between 80 and 90 percent of business-to-business traffic is conducted through EDI, and this number is growing 3 to 5 percent annually. Retail giants such as Wal-Mart Stores Inc., J.C. Penney Co., Supervalu Inc., and Hallmark Cards Inc. have been regular users of EDI. In fact, Wal-Mart has been one of the most influential companies driving new technology trends.

Since 2003, many companies have turned to a new technology in which data is transmitted over the Internet using the Applicability Statement 2 (AS2) protocol. The AS2 rules describe how to send data securely and ensure that the messages are received.

In September 2002, Wal-Mart asked its suppliers to switch from value-added networks (VANs) to AS2. Other companies have followed suit. One company claimed to have cut its costs by 70 percent after switching from a VAN to AS2. However, others have decided not to make the switch because of the costs involved.

Retailers are not the only businesses to take advantage of this technology. The healthcare industry also uses EDI to exchange patient information between medical providers and insurance companies. EDI is such a reliable means of transmitting data that a growing number of third-party payers, including Medicare, Medicaid, and commercial insurers, have started to require providers to submit claims electronically.

The Electronic Data Interchange rule was developed as part of the Health Insurance Portability and Accountability Act (HIPAA) and required compliance by October 16, 2003. This law requires all entities that transmit clinical data (including claims, referrals, and eligibility verification) to use the same electronic data file format. This can be accomplished by purchasing and maintaining a HIPAA-compliant practice management system (PMS) or by transmitting the data through a clearinghouse. The PMS is not the most cost-effective option for smaller entities, as it usually requires an administrator to maintain and upgrade the system as necessary. With the clearinghouse option, the entity sends data to a clearinghouse. The clearing-house then sends the data to the appropriate recipients in the appropriate format.


An electronic funds 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; and federal, state, and local tax payments.

In general, EFT transactions are transferred through an automated clearing house (ACH) operator. An ACH operator is a central clearing facility operated by a private organization or a Federal Reserve bank on behalf of participating financial institutions, to or from which financial institutions transmit or receive ACH transactions. The ACH network is a nationwide system for interbank transfers of electronic funds. It serves a network of regional Federal Reserve banks processing the distribution and settlement of electronic credits and debits among financial institutions.

ACH transactions are stored in an ACH file, which is a simple ASCII-format file that adheres to ACH specifications. A single ACH file holds multiple electronic transactions, each of which carries either a credit or debit value. Typically, a payroll ACH file contains many credit transactions to employees' checking or savings accounts, as well as a balancing debit transaction to the employer's payroll account. An originating bank sends electronic payment instructions to a receiving bank. In those instances, the electronic transfers are processed in batches and settled within a few days.

The National Automated Clearing House Association (NACHA) oversees the ACH network and is primarily responsible for establishing and maintaining its operating rules. All financial institutions moving electronic funds through the ACH system are bound by the NACHA Operating Rules, which cover everything from participant relationships and responsibilities to implementation, compliance, and liabilities. While the NACHA rules are specific and quite detailed, adhering to a strict set of rules is crucial to the smooth and successful operation of the ACH system.

As the use of home computers becomes more and more a part of everyday life, the popularity of online banking and online bill payments continues to grow. Many banks allow their customers to access account information over the Internet and to transfer funds between accounts. Many credit card companies and utility companies allow customers to pay their bills online through EFTs. Online bill payments can save the consumer time and money. The customer can pay a bill in a matter of minutes over the Internet instead of spending money on postage to send a paper check and risking the chance that the bill may arrive past the due date.

On October 28, 2004, the Check Clearing for the 21st Century Act, also known as Check 21, took effect. This federal law allows banks to transmit checks electronically and substitute electronic images for original paper checks. Check 21 provides many advantages for banks and financial institutions. By transmitting checks electronically, banks can reduce the amount of time it takes to receive funds. This is because they no longer have to wait for another bank to receive paper checks before they send the funds. In addition to saving time, Check 21 saves banks millions of dollars in transportation and storage costs.

While Check 21 has made the banks happy, it has made many consumers unhappy. Many people write checks thinking that it will take at least two or three days for them to clear, thus giving them time to deposit the appropriate funds to cover the check. However, with Check 21 banks can clear checks within 24 hours of receiving them, cutting this safety net by days in many cases. In addition, although banks can process checks and debit the customer's accounts right away, they can still hold out-of-state checks for five days or more.

Consumer groups complain that this law increases the chances of fraud, error, bounced check fees, and inconvenience. There may be times when a bank cannot accept an electronic check image. In that case, the other bank could create a substitute check that has the same legal weight as the paper check. Having both the original check and a substitute check around could result in both checks being cashed, either fraudulently or by an honest mistake.

SEE ALSO: Distribution and Distribution Requirements Planning ; Electronic Commerce ; The Internet

Cindy Rhodes Victor

Revised by Rhoda L. Wilburn


"Check it Out. Check Clearing for the 21st Century Act of 2003 Allows Banks to Transmit Cheques Electronically." U.S. News & World Report, 8 November 2004.

Mearian, Lucas. "First Horizon, SunTrust First Banks to Share Check Images; Southeastern Banks Overcome Technical Issues." Computerworld, 3 January 2005.

Sliwa, Carol. "EDI: Alive and Well After All These Years. Transactions Increase, Despite XML Option." Computerworld, 14 June 2004.

Stern, Linda. "That Check Won't Float." Newsweek, 20 September 2004.

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