Unit 3

Electronic Data Interchange:

Benefits of EDI, EDI technology, EDI standards, EDI communications, EDI
Implementation, EDI Agreements, EDI Security. Electronic Payment Systems

1. Electronic Data Interchange (EDI)

Definition:
Electronic Data Interchange (EDI) is the electronic exchange of business documents between
organizations in a standardized format. EDI allows businesses to automate transactions such as
purchase orders, invoices, and shipping notices, reducing the need for manual processing.

A. Benefits of EDI

1. Efficiency Improvement:

o Example: A retail company like Walmart uses EDI to automatically place orders with
suppliers, reducing the time needed to process orders.

o Impact: Eliminates manual data entry, reducing errors and speeding up business
processes.

2. Cost Reduction:

o Example: General Electric (GE) uses EDI to manage supplier transactions, cutting
down on paper, printing, and postage costs.

o Impact: Saves on operational costs by reducing the need for paper-based

transactions.

3. Improved Accuracy:

o Example: Automotive manufacturers use EDI to manage just-in-time (JIT) inventory

systems, ensuring accurate and timely deliveries.

o Impact: Reduces errors associated with manual data entry, such as typos or missing
information.

4. Enhanced Business Relationships:

o Example: Companies like Procter & Gamble use EDI to maintain seamless
communication with retail partners, improving supply chain collaboration.

o Impact: Strengthens business relationships by ensuring timely and accurate data

exchange.

5. Faster Processing Cycles:

o Example: Pharmaceutical companies use EDI to expedite order processing and

delivery, reducing lead times.
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o Impact: Accelerates the order-to-cash cycle, improving cash flow and customer
satisfaction.

B. EDI Technology

1. Transmission Methods:

o Value-Added Networks (VANs): Third-party networks that provide secure data

transmission, reliability, and data storage.

▪ Example: Companies like Verizon offer VAN services to businesses for EDI.

o Direct EDI: Establishing a direct connection between trading partners, reducing

third-party costs.

▪ Example: Large corporations like Ford may use direct EDI with their
suppliers for real-time data exchange.

o Internet-Based EDI: Uses the internet for EDI transactions, reducing costs associated
with traditional VANs.

▪ Example: Small to medium-sized enterprises (SMEs) may adopt internet-

based EDI to save on operational costs.

2. EDI Software:

o Mapping Software: Converts business data into standard EDI formats.

▪ Example: IBM Sterling B2B Integrator.

o Translation Software: Translates EDI formats into a readable format for internal
systems.

▪ Example: SAP’s EDI software for integrating with enterprise resource

planning (ERP) systems.

C. EDI Standards

1. ANSI X12 (American National Standards Institute):

o Description: Widely used in North America, particularly in industries like retail,

healthcare, and government.

o Example: Walmart uses ANSI X12 for supplier transactions.

o Impact: Ensures uniformity and interoperability across different industries and

systems.

2. EDIFACT (Electronic Data Interchange for Administration, Commerce, and Transport):

o Description: International standard developed by the United Nations, commonly

used in Europe and Asia.
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o Example: European companies like Siemens use EDIFACT for international

transactions.

o Impact: Facilitates global trade by providing a standardized format for cross-border

transactions.

3. TRADACOMS (Trading Data Communications Standard):

o Description: Primarily used in the UK for retail transactions.

o Example: UK grocery chains may use TRADACOMS for ordering products from
suppliers.

o Impact: Supports specific industry needs with tailored data formats.

D. EDI Communications

1. Synchronous Communication:

o Description: Real-time exchange of information between two systems.

o Example: A logistics company might use synchronous EDI to receive real-time

inventory updates.

o Impact: Ensures immediate data exchange, reducing delays in business processes.

2. Asynchronous Communication:

o Description: Data is transmitted and received at different times.

o Example: A retailer may send an order overnight, which the supplier processes the
next morning.

o Impact: Provides flexibility in data transmission but may lead to slight delays.

E. EDI Implementation

1. Planning and Preparation:

o Steps: Identify business processes for EDI, select EDI software, and choose trading
partners.

o Example: A manufacturing firm plans to implement EDI to automate its supply chain.

2. Testing:

o Steps: Conduct internal and external testing to ensure EDI systems work correctly.

o Example: Before going live, a company might test EDI with a small set of suppliers to
troubleshoot issues.

3. Training:
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o Steps: Provide training for employees and trading partners on EDI processes.

o Example: A healthcare provider trains its staff on using EDI for billing and insurance
claims.

4. Monitoring and Maintenance:

o Steps: Continuously monitor EDI transactions and maintain the system.

o Example: An e-commerce company monitors its EDI system for errors or delays in
order processing.

F. EDI Agreements

1. Trading Partner Agreements (TPAs):

o Description: Contracts between companies that outline the terms and conditions for
EDI transactions.

o Example: A TPA between a retailer and a supplier specifies the format, standards,
and timing for data exchange.

o Importance: Ensures clear understanding and compliance with EDI requirements by

both parties.

2. Service Level Agreements (SLAs):

o Description: Agreements that define the expected performance and service levels
for EDI transactions.

o Example: An SLA might specify the maximum allowable time for processing and
acknowledging an order.

o Importance: Provides a benchmark for evaluating EDI performance and resolving

disputes.

G. EDI Security

1. Encryption:

o Description: Securing data by converting it into a code during transmission.

o Example: A financial institution uses encryption to protect transaction data sent via
EDI.

o Importance: Prevents unauthorized access to sensitive information during

transmission.

2. Authentication:

o Description: Verifying the identity of the parties involved in the EDI transaction.
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o Example: A company might use digital signatures to ensure the authenticity of an

EDI document.

o Importance: Ensures that data is exchanged with verified and trusted partners.

3. Non-Repudiation:

o Description: Ensuring that a party cannot deny the receipt or origin of a document.

o Example: Using digital certificates to provide proof of sending and receiving EDI
documents.

o Importance: Provides legal protection in case of disputes.

2. Electronic Payment Systems

Definition:
Electronic payment systems facilitate the transfer of funds over electronic networks, enabling
consumers and businesses to complete transactions online. These systems are critical for the
functioning of e-commerce.

A. Types of Electronic Payment Systems

1. Credit/Debit Card Payments:

o Example: Visa, MasterCard, American Express.

o Process: Customers enter card details on a secure payment page; funds are
transferred from the customer's account to the merchant.

o Benefits: Widely accepted, convenient, and secure with encryption.

o Challenges: Transaction fees, fraud risk, and chargebacks.

2. Digital Wallets:

o Example: PayPal, Apple Pay, Google Wallet.

o Process: Customers store card details in a digital wallet and make payments with a
single click or tap.

o Benefits: Fast, convenient, and secure with tokenization and encryption.

o Challenges: Limited acceptance by some merchants, dependency on technology.

3. Cryptocurrency:

o Example: Bitcoin, Ethereum.

o Process: Decentralized digital currency transactions conducted through blockchain

technology.
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o Benefits: Low transaction fees, anonymity, and no need for intermediaries.

o Challenges: Volatility, regulatory uncertainty, and limited acceptance.

4. Bank Transfers:

o Example: ACH (Automated Clearing House) transfers, wire transfers.

o Process: Funds are transferred directly from one bank account to another.

o Benefits: Secure and direct, with no need for intermediaries.

o Challenges: Longer processing times, especially for international transfers.

5. Mobile Payments:

o Example: M-Pesa, Venmo.

o Process: Payments made through mobile phones using SMS, mobile apps, or NFC
technology.

o Benefits: Convenient for users without access to traditional banking, fast

transactions.

o Challenges: Security concerns, especially with SMS-based payments.

B. Security in Electronic Payment Systems

1. SSL (Secure Socket Layer) Encryption:

o Description: Protocol for establishing a secure connection between a client and a

server.

o Example: Online shopping websites use SSL to protect customers' credit card
information during checkout.

o Importance: Ensures that sensitive information is encrypted and cannot be

intercepted during transmission.

2. Tokenization:

o Description: Replacing sensitive data with a unique identifier (token) that has no
exploitable value.

o Example: Digital wallets like Apple Pay use tokenization to secure payment
information.

o Importance: Reduces the risk of data breaches by ensuring that card details are not
stored on merchants' servers.

3. Two-Factor Authentication (2FA):

o Description: Requires users to provide two forms of identification before accessing

an account or completing a transaction.
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o Example: Online banking apps require a password and a one-time password (OTP)
sent to the user's phone.

o Importance: Adds an extra layer of security, making it harder for unauthorized users
to access accounts.

4. Biometric Authentication:

o Description: Uses physical characteristics like fingerprints, facial recognition, or

voice recognition for authentication.

o Example: Apple Pay allows users to authenticate payments using Face ID or Touch
ID.

o Importance: Provides a high level of security by using unique and hard-to-replicate

biological traits.