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The U.S. payment systems transfer over $4 trillion each day in pay­ments. The U.S government's use of EFT exceeded 50 percent of the one billion payments made by various federal agencies in one year. According to a survey by American Banker, corporate treasurers of companies exceeding $10 million in annual sales named electronic cash management services, with financial EDI at its core, as the most im­portant issue to corporate finance officers.

Companies are now extending their supply chain management to automate the payment and the collection of funds. Businesses will find the benefits of cash savings, cash management, improved funds col­lection, and increased customer service too attractive to ignore. None­theless, an entity that has not been addressed as an important part of the supply chain is the financial institution. Financial institutions are approaching the era of not just a bank, but a value-added bank (VAB). VABs are able to assist businesses with payment origination, remit­tance receipt, and fraud prevention.

Financial institutions have been exchanging information with one another on debits and credits through their own private banking format known as automated clearinghouse (ACH), more commonly referred to as electronic funds transfer (EFT).

The ACH system is not to be confused with wire transfers (SWIFT). SWIFT was designed primarily for moving large dollar amounts insingle payments, whereas ACH was designed as an alternative to pa­per checks.

Financial EDI merges the EDI payments document known as the pay­ment/remittance advice (transaction set 820) into the existing ACH stan­dards. The ACH standard uses the EDI payment/remittance advice to pro­vide the remittance information to the payee. This allows the payee to identify the details needed to perform the necessary cash reconciliation to the invoices in the payee's accounts receivable system.

Cost savings can be achieved from both the payment and disburse­ment side. On the receiving side, electronic payments can save be­tween $.75 and $5.00 per item, compared to a check system. FEDI can save an additional $ 1.00 to $2.50 per item in internal applications, such as matching receivables against outstanding invoices. On the disburse­ment side, savings usually aren't as large but still can be significant.Estimates of per-item savings on the disbursement side usually range between $.60 and $.80.

In addition to reducing costs, FEDI also improves cash manage­ment. Electronic payments remove payment timing uncertainties and ensure funds availability. Both parties know the exact date on which rands will transfer from one account to another. This information can improve cash management practices for the payer and the payee.

One important FEDI timing issue is sometimes misunderstood. EFT payments do not have to be made any earlier than required in the paper environment. The issue of float loss can be neutralized by changing the electronic payment due date, which will account for the float time normally available in paper checks.

Since FEDI automates many activities that were previously done manually, more time can be spent on real problems and exceptions. Routine transactions are streamlined and instantly processed. This al­lows staff the time to focus on irregular or problem payments. If a payment warrants further inspection, there is now more time to do that.

In terms of fraud prevention, two of the systems VABs provide are known as positive pay and negative pay systems.

Positive pay is when the payer provides their financial institution with a list of issued checks or authorized debits. The payer's financial institution will notify the payer of any debits that are not matched in the list of authorized debits. Payments not listed in the list of autho­rized debits will not occur unless a confirmation from the payer exists.

Negative pay is when the payer's financial institution provides the payer with a list of debits to be issued payment by a statement known as the financial information report and the payer notifies their financial institution of any checks or debits that are not to be paid. The payer then selects those debits that are not authorized.

To Be Continued


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