EDI and Electronic Commerce in Banking:
Extract: Case Study
EDIBANX- Creating a new EDI Solution for the US Marketplace
Extract's Table of Contents:
Background
Even though financial EDI and EDI payments capability have been operating in the US longer than anywhere else, there has
 been slow growth and uptake. One concern that is often expressed is the inability of the vast majority of the over 10,000 banks in the US to receive EDI payment transactions. Generally, there has been no problem in moving the value from originator to receiver. As the remittance detail becomes increasingly important to the successful completion of the business transaction, however, having EDI-capable receivers is of greater importance than ever before. This has become an element of frustration.
This frustration, and need to develop a complete end-to-end capability, has led to the creation of the EDI Bank Alliance Network Exchange (EDIBANX) initiative - which will act as a payments network within a payments network. The mission statement for this group is:
- To become the dominant electronic commerce service provider to link US-based corporations with their trading partners.
This is an interesting statement because it does not limit the organisation to financial applications of EDI, although that is EDIBANX's first objective.
Most of the EDI payments moving through the US ACH system (managed by NACHA) are processed without any specific management requirements beyond those established on a lowest common denominator basis and it is been quite common for remittance detail to fail to reach the receiving organisation at all - let alone electronically. With business demand for an effective financial EDI solution growing, a group of financial institutions with a significant investment in the EDI and electronic services business decided they needed to develop a more effective - and far reaching solution for corporations requiring financial EDI and information-based financial exchange.
Since 1994, the most active and prominent banks in the cash management and payments processing business in the US have joined EDIBANX. By 1996, these 14 or so member banks were processing more than 60 percent of the US lockbox transactions and more than 50 percent of controlled disbursements. Since these organisations represented such a large market share of the potential EDI client base, it made sense for them to launch an aggressive initiative to respond to the market.
EDIBANX Transactions
All EDIBANX transactions remain in ANSI X12 format. Previously, corporations or their banks had to enclose native X12 transactions in an ACH format "envelope" such as a CCD or a CTX before sending them through the ACH system. The primary purpose of this envelope was to place the financial and bank routing and transit data in prominence so that they would flow through the ACH payment system as a financial transaction with an addenda record. Part of the problem with the ACH-based system is that some receiver banks do not consider addenda as a critical deliverable - especially if there is any difficulty in getting a client to pay for the service.
The payment transportation structure that the group has devised relies on the use of the ANSI X12 standard 820 (payment with remittance detail) and the 835 (healthcare payment) as the key transactions sets. Each transaction receives a series of acknowledgement transactions based on the ANSI 996, 997, 824 and 831. In this manner, the system resembles the Canadian financial EDI transaction model (see
Canadian Financial EDI case study). There are, however, some key differences, particularly in the area of added services.
One of the design features of the EDIBANX initiative is the creation of a Trading Partner Directory essentially a list of declared EDI-capable corporations which can help companies starting, or growing, their EDI programmes to identify and qualify trading partners capable of sending and receiving transactions electronically. Locating electronic trading partners has proven to be both expensive and time consuming for many organisations - and it is the intent of the initiative to provide a resolution to this problem. The directory is available to subscribers on diskette, paper or over the Internet. By 1996, over 5,000 businesses were listed.
Key to the success of the initiative is the ability to deliver transactions in an effective manner to the diverse types of receiver organisations that subscribe to the EDIBANX service. For example, an EDI-capable customer might transmit its payable or billing file to a member bank. The bank would query the authorised payment or billing stream and identify EDI-capable receivers from the EDIBANX database. For those trading partners listed as being capable of receiving EDI transactions, the bank would distribute the payments or billing documents through the EDIBANX network. The receiving financial institution would report the activity to the corporation using existing reporting links such as direct transmission, balance reporting, fax, e-mail or paper advice. If a trading partner is not included in the EDIBANX directory, the bank would create paper documentation and distribute it via the post or courier.
By offering a collective, integrated service capability, EDIBANX members deflect much of the difficulty that corporations have had in rolling out their EDI programmes. in an EDI programme, there is initial success as the more aggressive trading partners all work together to implement a process for their own strategic needs. But, after this is achieved, there can be problems associated with trying to convert the next layer of participants. These organisations can be reluctant to change, and it can be more expensive than anticipated and can cause the process to slow down. The EDIBANX solution is one more partnership to motivate the recalcitrant supplier.
One of the longer-term goals of EDIBANX members is to offer true value-added services - which step beyond what might be seen as the traditional boundaries of banking - acting true value-added banks (VABs).
For example, in collections, a member bank may not only receive payments and details but also reconcile the client's accounts receivable. The bank can then download updated receivables files to its client for more effective cash and credit management. The bank can even take over more of the management of the billing cycle by issuing and tracking invoices on behalf of its client. This would lead to a full outsource service for accounts receivable management - something that, if done effectively and at reasonable economies of scale, can offload costs from the corporation and increase the efficiency of the overall collections process.
The converse of receivables management is outsourced payables management. Banks can also play a more obvious role as companies streamline their payables operations. In the period 1993-1996, many companies outsourced cheque printing to their banks. In the future, banks may also handle the routine processes involved with payment authorisations. This would require the establishment of procedures for referral for certain unusual value or payee payments, but generally could be managed by either the bank receiving and adjudicating an invoice or the bank paying a regular amount for utilities and periodic services.
Beyond Financial EDI
EDIBANX members hope to play a lead role in managing EDI data streams and adding value to the electronic exchange process through improved and speedier information reconcilement and reporting capabilities. One of the mission statements of the group is to
"expand the scope of transaction types processed to include those transactions that are beyond the scope of financial
EDI". This has yet to be interpreted in specific terms but clearly suggests that the conveyance and management of documents such as trade documents, invoices and advanced ship notices are likely to be included. This indicates the true breadth of this initiative - it could be an example of what financial institutions worldwide may have to develop to remain competitive in their own marketplaces.
Evaluation
This business-driven approach is what sets the EDIBANX initiative apart from many of the purely transaction-based financial EDI approaches that have emerged in other countries. By not only providing a mechanism for the effective exchange of payments- related information, but also providing value-added services such as the directory, EDIBANX is a significant example of the next wave of EDI solutions in the financial industry. Its future is dependent on the reaction of the business market and that has yet to happen.
It is clear that if the EDIBANX effort does not succeed in creating faster uptake in EDI and electronic commerce services offered by banks that the well may indeed have run dry.
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