Financial EDI and EFT

Author: Michael Kinahan
Purpose: 547 Project Report

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Electronic Funds Transfer (EFT) is actually quite a generic term. The label EFT encompasses any monetary transaction that is completed by electronic means; i.e. Automated Teller Machine (ATM) transactions, wire transfers, point of sale (POS) transactions, and tape exchange of financial data. This report however, will focus on the coupling of EFT with Electronic Data Interchange (EDI) technologies -- where EDI refers to computer- to-computer electronic exchange of business documents such as purchase orders and shipping notices between business partners, in a computer readable format.

Combining EDI and EFT

With the ever increasing number of businesses utilizing EDI technologies to communicate with their suppliers and customers to conduct business -- invoices, orders, etc -- they will not want their payment information to be paper based. It is therefor natural for these companies to take the next step to incorporating EFT with EDI. By combining EFT with the advantages provided by EDI (automatic processing of business transactions without human intervention) businesses gain in many ways:

The role of banks in EDI

When it comes right down to it, banks are the only organizations that can process any sort of money transaction. If two companies wish to enter into an EDI partnership, they may directly transfer all ordering and invoice information directly between each other, but any transfer of funds must be made via an electronic request to a bank. Upon receipt of this request, the bank may either transfer the funds directly (if both companies use the same bank) or go through appropriate channels to settle with another bank (see sections on banking in Canada or the U.S.)

EFT in the U.S.A.

The Automated Clearing House (ACH)

The ACH was developed as a computer-based alternative to the paper- based check-clearing process. Under paper-based systems, checks are sorted by financial institutions, and bundles of paper checks are exchanged among the various banks. Under ACH, electronic images of the checks are sorted and then the electronic records are exchanged.

The electronic transfer can be completed by network connections or by physical transfer of magnetic tapes of floppy disks. The format of the information, and the handling and processing of the data is defined by the National Automated Clearing House Association (NACHA).

Some important dates in the development of ACH:

ACH Formats

Cash Concentration or Disbursement (CCD): From 1974 until 1983, CCD was the only format provided by the ACH system. This format only permits single payment transactions, with minimal room for advice information (94 total characters with 34 available for advice). There was also no standard for the advice information, therefore it could not be automatically processed. These limitations of the CCD format were major reasons why it was not used extensively for corporate trade.

Cash Concentration or Disbursement plus Addendum (CCD+): This is simply the CCD format with an extra 80-character addendum added for more advice information.

Corporate Trade Payment (CTP): This format allows for much more advice information (up to 4999 messages of 94 characters each). Thus, the payee could receive the same information normally included in a paper-based payment advice. Unfortuanately, this format still doesn't provide a standard for the advice information, therefore the information can't be automatically processes.

Corporate Trade Exchange (CTX): This format is a variable length format that supports the ANSI X12 standard for remittance advice. The CTX format provides an electronic envelope for the ANSI X12 820 Payment Order/Remittance Advice, therefore the advice information can be automatically processed through their EDI systems. This format makes the ACH an appropriate alternative to checks for corporate trade payments.

EFT and EDI in Canada

The Canadian Payments Association

The CPA-005 is an electronic enveloping structure that is designed and maintained by the Canadian Payments Association (CPA). The CPA is a quasi-governmental body, enacted by the Canadian Parliament, whose role is to "manage the evolution of the payments system in Canada".

EFT in Canada

Historically, Canada has conducted EFT transaction among banks using the CPA-005 format, which is similar to the CCD format. A typical CPA-005 EFT transaction flows as follows:

EDI banking in Canada

In 1989, Canada's six larges banks met to discuss the implications of EDI and how the banks might take advantage of it. The result was a revolutionary concept to design a new corporate payment mechanism that is not limited to simply extending the current EFT process.

The Canadian Inter-Financial EDI Committee (Inter*EDI) was formed to review international EDI successes or examples to use as a guide for the development of financial EDI in Canada. Unfortunately, no other banks, or even non-bank service providers, had integrated such an approach into their fabric. As a result, Inter*EDI defined a unique series of guidelines that outline the blueprint for EDI and EFT.

Legend of ANSI X12 forms:
  • 820: Payment Instructions
    Instructions from originating company to bank, or from one bank to another, detailing payment instructions.
  • 824: Application Acknowlegement
    An acknowledge sent to initiating company or bank indicating that the 820 form was processed without problem.
  • 997: Functional Acknowlegement
    An acknoledgement sent to initiating company or bank indicating initial receipt of the 820 form.

    Links to other sections of this report:

    EDI (Report by Sean Huggins-Chan)

    EFT (Report by Michael Kinahan)

    Network Providers (Report by Michael Franz)

    Case Study: Chevron Canada (Report by Alex Kislik)

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    Last updated on 23/03/95