547 Presentation

Electronic Data Interchange (EDI)


Electronic Fund$ Transfer (EFT)

Jeanette Long (long) Homepage , Mail
Paula Cooper (cooper) Homepage , Mail
Adam Wallace (wallacea) Homepage , Mail
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This report is a short summary on our 547 presentation presented in class on March 12, 1996. The presentation outlined, defined and illustrated current and future applications on Electronic Data Interchange (EDI) and Electronic Funds Transfer (EFT). In this report we would like to explore the current and future applications of EDI & EFT in our economy and society. We will try to avoid detailing the technical guts of EDI, but rather explain usage techniques and success levels.

Links to EDI WebGRIDs

Adam's EDI/EFT Grid
Jeanette's EDI/EFT Grid
Paula's EDI/EFT Grid

What is Electronic Data Interchange (EDI)?

Electronic data interchange (EDI) is often defined as the transfer of information, especially business documents, through electronic means. These business documents are often notices of shipments, invoices and purchasing orders which are used to communicate information between organizations. An example of the use of EDI is when a retail vendor uses EDI to make shipment requests from its suppliers.

One important distinguishing feature of EDI is that it is a computer-to-computer process. This automated process allows electronic data to be transferred without human intervention, transferring data that only computers can make sense of. Humans cannot decipher the content of such messages.

There are some common misconceptions about what is and what is not EDI. For example, e-mail is not considered EDI. E-mail is used to send information between humans that humans understand, whereas EDI is a computer-to-computer process. Similarly facsimiles are not EDI. Lastly, sharing of files over networks does not conform to the EDI definition because EDI often requires the translation of data into special formats and is generally an automated process.

How EDI Works

When EDI was first emerging in society, data was put onto magnetic tapes and these tapes were physically distributed to different EDI parties. Through improvements in technology the methods of EDI have become much more advanced, supplying us with two main methods for executing EDI: the store and forward approach and the point-to-point approach.

Store and Forward

A telephone analogy can be used to summarize how the store and forward approach works. If you call your friend and they do not answer their phone, you can still communicate by leaving a message on their answering machine. Similarly, the store and forward approach makes use of mailboxes where data can be stored. This approach usually makes use of Value Added Networks (VANs). VANs are privately owned networks which provide links between trading partners. Trading partners are the two user entities involved in the EDI interaction. VANs allocate a mailbox to each of these trading partners where their incoming EDI messages can be stored. VANs also provide EDI support services such as translation between different EDI formats, verification that message content has not been tampered with between transmission and receipt, encryption to provide added security, and tracking of messages to reveal the senders of EDI messages.

As mentioned, there is a sending trading partner as well as a receiving trading partner involved in the EDI transaction. Each trading partner has a proprietary format for their data, a format that possibly only their organization can understand and use. In order for these trading partners to be able to transfer information and make sense of one anothers' data they often translate their data into a common format called the EDI format. An EDI translator is responsible for translating from proprietary data formats to EDI formats, and vice versa. The process begins with data in a proprietary format being sent from the sending trading partner. This data then goes through the EDI translator and is translated into the common EDI format. The output of the EDI translator is an outer envelope, called the interchange envelope, which contains address information about which mailbox to place the EDI message in. There is also an inner envelope which constitutes the contents of the EDI message. These envelopes are then placed by the VAN into the designated trading partner's mailbox. When the receiving trading partner wants to retrieve EDI messages from their respective mailbox they simply make a request to the VAN and the EDI messages are translated into their proprietary data format by the EDI translator, thus completing the exchange of data.


The other common method for executing electronic data interchange is the point-to-point approach. This is a direct transmission of data from one trading partner's computer to the other's. Returning to the telephone analogy, if you call a friend who does not own an answering machine they must be at home to answer the phone in order for communication to occur. Similarly, in the point-to-point method both parties must be actively ready to send and receive data. Trading partners must coordinate their efforts, agreeing upon specific times to perform EDI. In this way the use of VANs is much more flexible.

Internet Vs. VANs

With the sudden emergence of the Internet there has been a push to include electronic data interchange capabilities on the Internet. There are predictions that this trend could put VANs out of business since the Internet provides cheaper access and greater interconnectivity. On the other hand, many believe VANs to provide a more secure method of EDI exchange with superlative support services. Overall it seems very likely that the migration of EDI to the Internet will be a success, but another possibly popular option will the use of VANs which are connected to the Internet.

EDI Standards

The Importance of Standards

One of the greatest requirements in order to implement successful EDI is the use of standards. Standards are often developed so that several trading partners are capable of communication with one another, but another option is to perform "any-to-any-mapping" in which each trading partner communicates with other trading partners through a special data format. The sending trading partner translates their data into the receiving trading partner's data format. This requires creating maps, or translations, for each trading partner that is interacted with, so many more maps are required for this technique. Though this may be a faster method since it only requires a single translation rather than the two translations required for translating to and from a common EDI format, it is limited by its inflexibility. The addition of a new trading partner requires creating new mapping applications, a time consuming process requiring much maintenance. In contrast, if a standard EDI format is adopted, which all trading partners use, then (in theory) the addition of a new trading partner should be nearly effortless. The United Nations (UN) provides us with an interesting analogy. In the UN it is not the case that all languages are directly translated to each other, but rather they are translated first to English and then from English to other languages. The UN demonstrates a real-life example of the use of a standard format which is translated to and from.

What Do Standards Consist Of?

Trading partners need to agree upon the standards that they will share for passing data, and must specify three main components of the data format. They must firstly identify what the unique codes are to be for the various data items. An example of this is the Universal Product Code (UPC), or bar-codes, which were first implemented in the food industry. This standard has now been adopted worldwide and is an example of successful EDI. The second major topic for trading partners to agree on is the meaning of various codes, and they must thirdly determine the sequence in which data will be sent. By developing these specifications carefully, trading partners can ensure that data is correctly translated back and forth.

Current Standards

The use of standards is a necessity not only between a few specific trading partners, but also on a national and international basis. In 1979 the American National Standards Institute (ANSI) created the Accredited Standards Committee (ASC) X12 standard, of which the Data Interchange Standards Association (DISA) is the secretariat. The ASC X12 standard provides specifications of the uniform EDI standards for business documents. It has been adopted widely in the United States, but without branching to other nations this causes a limitation in international EDI.

The United Nations/EDI for Administration, Commerce and Trade (UN/EDIFACT) standard was developed to fulfill this need for international EDI standards. Though this standard is an international standard, having been accepted by the International Standards Organization (ISO) in 1987, it is used primarily in the European countries. For the last five years it has also been the official EDI standard of Canada. The United States has not been as willing to conform since they have already adopted the ASC X12 standard which facilitates national trading. It has been suggested that this situation will be remedied in the future through the predicted synchronization of both the ASC X12 and UN/EDIFACT standards in 1997.

EDI Quiz

Questions from this quiz were given in the Presentation to stress points about EDI. We had great difficulty accessing this site; we always got the error "Netscape is unable to locate the server: www.erc.gmu.edu ... The Server does not have a DNS entry." but here is the URL anyways:


Current Social & Business Applications of EDI

EDI extended definition

Up until now the definition of EDI was restricted to those electronic transactions that were done automatically (without direct human involvement) in batch. We will extend the definition to incorporate those electronic transactions that are not necessarily excluded from human interaction, and to those that are done dynamically. This includes Point of Sale Systems, Efficient Customer Response Systems, certain Information systems and automated stock replenishment systems.

KMart Case Study

This case study will try to show how one instance of EDI has failed within an organization. When KMart instantiated their EDI system, it was innovative and state of the art for the time period. They took an enormous risk and at first received great successes, but this was due to the fact that none of its competitors were benefitting from the advantages of EDI. Once KMart's competitors acquired EDI systems (often better ones), KMart's EDI-related profit diminished and they soon found themselves financially exhausted.

In the early and mid 1980's KMart integrated an EDI point of sale and stock replenishing system into all of its 2000+ stores. Each store had a Unisys U6000/65 miltiprocessor UNIX based system hooked up to the VAN provider Prism. Every night each store would send their EDI transactions to Prism via satellite, which were then retrieved by KMart central server. This information would contain all of the sales figures for the day and stock information. After analysis from the central server, stock and point of sale instructions were sent to each store via Prism. The next day each store would retrieve their instructions, adjust prices accordingly and send out necessary stock orders via Prism.

Prism is a Value Added Network (VAN) that provides 3 independent or integrated services:

1) DataLink - basic EDI services;
2) DirectNet - Internet Services;
3) Express - E-Mail Services.

for more information you can visit Prism's homepage at http://www.prisminfo.com/

KMart has conglomerated about 300 suppliers over the last 10-15 years of which only about 17 percent (about 50) used EDI systems effectively. KMart's system would send out requests for inventory nightly, but most of the suppliers would only check their EDI services weekly. KMart's systems were not designed to take supplier latency into consideration and soon found their stores under stocked and losing a yearly loss of 82 million dollars by August of 1995. Their systems were also incapable of detecting trends which were also causing shortages, especially on those items which were seasonal (like suntan lotion or anti-freeze).

After firing and hiring, KMart restructured, reducing the suppliers from 300 to about 50, replacing all of the unix workstations with Windows NT servers and has begun testing Decision Support Systems (DSSs) to help solve the trend problems. They have also moved from the expensive satellite communication transfer to less expensive frame delays. KMart's in-stock accuracy has risen to 92.5% already.

More information on Kmart can be found at http://www.kmart.com

Frito-Lay Case Study

This case study will try to show how one instance of EDI has become a thriving success for an organization. Frito-lay's EDI Information System (IS) is one of a kind and has been heavily integrated into the daily operation of the business.

As you probably know Frito-lay makes snack Products (Doritos, Lays, etc) and is currently a 4.5 billion dollar company. It recently has integrated an EDI system into their delivery and stocking system. Every delivery person carries a hand held computer that they use to record all products delivered, status of all Frito-lay's stock along with competitors stock and information pertaining to the merchants business. The delivery workers in effect, become a sales and marketing representative for Frito-lay's customers. Frito-lay has 10,000 sales people, tracking 14,000,000 products nightly. Its EDI based IS systems saves approximately 30-50,000 man hours of paper work per week.

The 9 minute movie on Frito-lay's EDI IS can be found at University of Calgary's COM/MEDIA library under the title:

Real World Perspectives: Video To accompany Information ...
call number: XMV55792

More information on Frito-Lay can be found at http://www.fritolay.com

Stock Market

The stock market is becoming digital. Software Decision Support Applications are now available that are designed to analyze stock market values at real-time and make buy and sell decisions based on this analyzed data. An example of such an application is Insider TA.

Some of these software applications can legally buy and sell automatically. This, in the past has caused a domino effect. This is what happened last year, when the stock market had its worst crash in history. A few of these applications started selling and other applications noticed this and in turn began to sell. Within a matter of a few hours, the bottom of the stock market fell out. There have been new measures instantiated in the American stock market that monitors the rate at which stock is sold. If the rate surpasses a certain level, the stock is automatically frozen, and all electronic transactions are suspended.

The stock market in England has been completely EDIed; buying and selling transactions can only be done electronically by brokers and electronic brokers (the software packages mentioned above).

Future Applications of EDI

In the past EDI as been restricted to batch processing. Now that information plays such an important role in our society, information is needed dynamically. We will soon see more real-time integrated EDI systems emerging. These systems will automatically dial up other systems to process EDI transactions as needed. Because of this you will probably see more Point to Point EDI transactions rather than those through VAN services.

Benefits of EDI

There are several ways in which EDI facilitates more efficient communication of data.

Faster Transfer of Data
Data can be transferred faster using EDI since electronic data travels much faster than physically delivering paper documents. In addition the data is usable faster since it does not need to be manually retyped.

Improved Data Integrity
This elimination of human typing also avoids the possibility of typing errors and other transfer errors attributed to human intervention.

Easier Manipulation of Data Data which is received in an electronic format through EDI is easier to reroute to various departments in a company. If solely paper documents were used it would be much more difficult to extract data for different purposes.

Improved Security
It has been suggested that using EDI to transfer data provides a more secure transmission of data than its predecessor, the paper document. Two reasons for why this might be the case are the control of access to EDI data in mailboxes as well as the verification checks that messages sent are equivalent to messages received.

More Cost Efficient
On the whole it is much cheaper to transfer data through EDI methods. An example of this is the Public Warehousing Industry which estimated savings of $300 million dollars per year through EDI implementations.

Enables "Just-In-Time" Programs
Previously in order to meet a deadline, such as a bid for a project, a company would have to take into account the physical transfer time of a document. Through the "just-in-time" programs facilitated through EDI, a company can wait until the last minute before sending a bid electronically.

Overall EDI can allow companies to be more efficient and gain a competitive edge.

Drawbacks of EDI

Though EDI is very advantageous, there do exist some concerns which should be addressed.

Increased Advantage for Larger Companies
Often EDI is implemented more easily by larger companies since smaller companies do not necessarily have the resources to initially implement EDI. This gives the larger companies a competitive edge, being very detrimental to the smaller companies. The emerging use of the Internet to provide EDI services may be a more affordable option, allowing these smaller players to use EDI. Additionally, service bureaus can be used to allow entities without EDI capabilities to perform EDI. The user sends e-mail, files or faxes to the service bureau and the service bureau can use image recognition and data capture technologies to translate the data to an EDI format. The service bureau can then execute the electronic data interchange on behalf of its user.

Difficult to Agree Upon Standards
Though standards have been developed, there is no way to force trading partners to accept these standards. Trading partners must be prepared to cooperate with one another in order to develop common rules. This cooperation often contradicts normal business tactics since businesses primarily function so as to give the advantage to themselves rather than others. A dilemma arises between cooperation and competition. Even when standards are agreed upon, if they are not defined extremely well, trading partners can interpret the specifications in different ways, thus defeating the purpose of standards.

Electronic Funds Transfer (EFT)


There seems to be some disagreement in the computer world about how Electronic Funds Transfer (EFT) actually relates to EDI. One source claims EFT to be purely a subset of EDI. Another source regards the two technologies as inter-related but still different. In any case, Electronic Funds Transfer, as the name suggests, involves the transfer of funds, or electronic money, between two end parties, usually financial institutions. A broad definition of EFT also includes ATMs, debit cards, credit cards and Smart Cards. For the purposes of this presentation, we will be using this broad definition of EFT.

You have probably already used some form of Electronic Funds Transfer (EFT). For example, you may have paid for something by Interact, or made a payment to your credit card at an ATM machine. If you're lucky enough, you may have even had the government directly deposit a tax refund or GST payment into your bank account. However, most of the time, you probably use or receive some other form of payment for goods like cash. That's pretty common since out of all payment transactions, almost 85% involve cash, and only 2% involve electronic transfers. Still, in electronic transactions there is usually much more money involved.

Automated Clearing Houses:

Transactions between banks usually involve a clearing house, which facilitates the transfer of funds between different financial institutions. For example, when you deposit a cheque that is from a bank other than your own into your bank account, the cheque will probably end up at a clearing house, so the banks can co-ordinate the transfer of funds. Automatic transfer payments don't involve actual paper cheques, but rather electronic requests for funds transfer. These requests go through an automated clearing house.

One example of an automated clearing house is CHIPs. CHIPs is an acronym for the Clearing House Interbank Payments System. Essentially it as an automated system run by eleven New York banks to arrange money transfers between the 122 member banks (as of 1992). Each bank is charged $0.18 per transaction, regardless of the size of the payment being made. Believe it or not, almost 1 trillion dollars in electronic money moves through the CHIPs computers each business day, with payments being settled at the end of each day.

Some Comments about Automated Payments...


Eliminates Monotonous Clerical Work
It eliminates a lot of administrative and clerical work. This includes writing and sending cheques, and processing invoices.

Alternative Payment Method
It provides another payment alternative for the buyer.

It is cheaper to request a transfer payment than it is to write a cheque.

Reduced Transfer Latency
The seller gets the money within a very short time period (usually between 24-48 hours)


Loss of Float for the Buyer
With traditional means, buyers have a "float" period, the time between the date of sale and the date that the seller actually gets the cheque. Many times, buyers desire this float time, so they can accrue the money, or use the money for something else in the meantime.

Bad for Small Companies
Small companies may lose out if they can't afford to implement some kind of automated payment, since some larger companies are beginning to refuse to do business with those that do not have some kind of EDI/EFT capability.


For business and financial transactions, it is usually important to verify the identity of the sender of an electronic message, and that the message itself has not been tampered with. This is called Authentication . At times, it is also important to keep a message confidential, as it may contain sensitive information. This involves ensuring Privacy . The use of digital signatures is one method of providing authentication, and encryption is one method to provide privacy. Both types of security involve the use of one or more keys, which is a sequence of bits, and algorithms which are applied to electronic messages to secure them.


For digital signatures, the sender has two keys, a private key, which is kept secret and a public key, which is publicly known. The sender uses the private key and an algorithm on the message to be sent to come up with some pattern of bits. This is known as a digital signature, and is attached to the message to be sent. The receiver, upon receiving the message, performs some analysis on the message, using the attached signature, the public key, and an algorithm. If the message is valid, the result should hold in a simple mathematical relation.


Encryption is the process of scrambling data so that its meaning is hidden. Encoding data usually involves a key which is a used with an encryption algorithm. A message can be decrypted in the same way (i.e. with a key and an algorithm). The keys used to encrypt and decrypt data may be the same (known as a symmetric key system) or may be different (known as an asymmetric key system). One common algorithm used by many financial institutions to secure fund transfer messages, is the Data Encryption Standard (DES). It is a symmetric key system with the key being 64 bits long.

Even so, if you own a business and are involved in EDI or EFT and concerned about security, you should actually worry more about a frustrated employee than about some person hacking into your system. In most of the computer fraud cases that have surfaced, they usually involve some insider with authorized access to the system.

For more information, visit " RSA's Frequently Asked Questions about Today's Cryptography"

Money on the Internet

Credit and digital Money:

We have already seen that home-shopping is one of the potential uses of the Internet. Yet, it is still rather unclear on exactly how payment will be handled on the Internet. Many efforts usually involve some form of credit, that is, you buy something off the Internet by providing your credit card number. Since many people are wary about releasing their credit card number on the Internet, there needs to be other forms of Internet money. One company that tries to meet this need is Cybercash. This is an on-line bank that has been in existence for about a year and a half. Currently, Cybercash is involved in shopping on the Internet, but still purchases are made on a credit card. However, in the future Cybercash would like to offer "cash"-like transactions.

To implement the idea of digital cash Cybercash would need to work in cooperation with real banks. These banks would allow their customers to open an account with "electronic money", called an electronic purse. With Cybercash software, users can transfer money from their normal bank accounts into their electronic money accounts.

When the customer wants to buy an Internet item, he or she would withdraw money from these electronic money accounts in the form of digital tokens to pay for it. Merchants would contact Cybercash to verify that the tokens were valid, and to instruct them where to deposit the payment. Thus to use digital money, users can only shop at merchants with Cybercash (or compatible) software. The current Cybercash software for customers and merchants, for now only handling credit card information, is free. For details on how to obtain this software, visit the " Cybercash website"

The idea of digital money on the Internet is still relatively new. Undoubtedly, it still has some issues to resolve. For example, who controls this type of commerce? The Internet is global, but currency is usually controlled by a nation's government. Some believe there may eventually be some form of electronic legal tender.

Smart Cards:

Another form of electronic money has developed in the form of smart cards. A smart card, which looks like an ordinary bank or credit card, is a card with an integrated circuit, or chip on it. The chip holds information, and furthermore, may control who actually has access to that information. The person(s) who gets access to whatever is stored on the Smart Card, may be Everyone, the Cardholder only, or a Third Party only. When access is restricted, this means you have to use your Smart Card with some other form of identification like a Personal Identification Number (PIN). Virtually any type of information can be stored on a Smart Card, which gives it endless possibilities for use, and not only in terms of electronic money.

One type of debit-like smart card that you may be familiar with are the photocopy cards they sell at MacKimmie Library, which are prepaid smart cards. Prepaid smart cards are pretty much just like cash. Whenever you spend on a smart card, the transaction is "anonymous", the only people aware of the transaction are whoever or whatever you are buying from, and yourself. Furthermore, for many of these types of smart cards, if you lose it, there is really not much you can do to recover your money.

The largest Smart Card project in the world is the prepaid telephone card used in France. Nearly all public pay phones there use prepaid smart cards. It's sensible because it reduces maintenance costs and deters crime. It has been estimated that, by the year 2000, over 100 countries will be using the smart cards for public pay phones.

Smart cards have different levels of security. They may contain read only information, or may allow a smart card reader to add information but not erase any. Or, a smart card may be readable, writable, and erasable. Some smart cards are even capable of applying encryption and decryption techniques, if they must transmit information that is confidential!

With regards to EDI, smart cards can be used for controlling who has access to sealing and signing transactions.

For more on Smart Cards, visit "GEMPLUS Smart Card Tutorial"

Advantages of EFT

EFT provides both the payer and payee with the following advantages:

Check Processing
Eliminates the labor costs of check processing.

Reduced Costs
Reduces the cost of handling and administering invoices.

Accounts Receivable
Reduces and controls accounts receivable.

Provides "Real-time", "On-line" account validation.

Speeds payment and settlement.

Alternative Payment Method
Provides alternative method of payment for customers without major credit cards. (Approximately one quarter of all U.S. adult consumers).

Alternative Payment Method
Provides alternative method of payment for customers who would otherwise incur credit card finance charges (Approximately two thirds of all U.S. adult consumers).

Alternative Payment Method
Provides alternative method of payment for customers with credit cards that have reached credit limits.

No Cheques
Removes the risk, loss, inconvenience and customer dissatisfaction experienced with the use of checks.

New Customers
Retains existing customers and attracts new customers.

Disadvantages of EFT

No Float
Loss of cash float for banks and business. Many businesses depend on the cash float for liquid funds for temporary expenditures. Banks use monetary floats for investing. EFT often catches banks off guard leaving them with insufficient funds for EFT balancing at the end of the day.

Busy lines
The user is inconvenienced when communication lines are busy or down, and are often left without a method of payment.

Account tracking
Often difficult for users to keep clear up-to-date records of their monetary transactions. Often the user no longer visits a bank (since transactions can be done electronically)

Errors are often hard to find and are often labelled impossible by the service provider.

Though rare, insider jobs are attempted, and relatively undetected.


[WWW] "Bridging the Technology Gap: Fax-to-EDI Service Brings High- and Low-Tech Users Back Into the Same Tent"

[WWW] "DNS Worldwide - All About EDI"

[WWW] "EC EDI Terms and Definitions"

[WWW] "EDI and Any to Any Mapping"

[WWW] "EDI and Server-Server Technologies"

[WWW] "EDI Glossary"

[WWW] "EDI Impact: Social & Economic Impact Of Electronic Data Interchange (EDI)"

[WWW] "EDI Report"

[WWW] "EDI Revolution"

[WWW] "EDI Works Because..."

[WWW] "Electronic Commerce on the Internet"

[WWW] "Electronic Funds Clearinghouse, Inc."

[WWW] "Electronic Means"

[WWW] "Electronic Transcripts--EDI in Academic Administration"

[WWW] "Frito-Lay Inc. Homepage"

[WWW] "GEMPLUS Smart Card Tutorial"

[WWW] "The History of EDI"

[WWW] "Kmart Homepage"

[WWW] "More About Electronic Data Interchange (EDI)"

[WWW] "PaperFree Systems - EDI Introduction"

[WWW] "Prism Infomation Inc. Homepage"

[WWW] "RSA's Frequently Asked Questions about Today's Cryptography"

[WWW] "Understanding EDI"

[WWW] "Uniform Coding: The Key to Successful EDI"

[WWW] "VANs (Value-Added Networks)"

[WWW] "What is EDI?"

Moad, Jeff, "Blue light Blues." PC Week, September 25, 1995: v12 n38 pE1(2) Article from Computer Select

Moad, Jeff, "Kmart's IT crisis: electronic links needed between stores supplier." PC Week, April 3, 1995: v12 n38 pE1(2) Article from Computer Select

Passel, Peter, "Fast Money." New York Times Magazine, October 18, 1992: pgs. 42-43,66,75

Sokol, Phyllis K. EDI - The Competitive Edge. New York: McGraw- Hill Book Company, 1989

Thierfauf, Robert J. Electronic Data Interchange in Finance and Accounting. New York: Quorum Books, 1990

Wong, Ken, and Steve Watt, Managing Information Security: A Non- technical Management Guide. Oxford: Elsevier Advanced Technology, 1990

Last modified March 15th, 1996
Jeanette Long (long) Homepage , Mail
Paula Cooper (cooper) Homepage , Mail
Adam Wallace (wallacea) Homepage , Mail