Banks Seeking Cheaper EDI on Internet

Several of the nation's largest financial institutions are working on pilot programs to move electronic data interchange services to the Internet.

Electronic data interchange, or EDI, is a service many banks provide their cash management customers, but few institutions make money at it, experts said.

Currently, most EDI, which is electronic exchange of business documents in standard computer formats, is done over private networks, which are costly to build and maintain.

By replacing these networks, or augmenting their use, with the Internet, banks hope to reduce costs and attract more customers to their services.

BankAmerica Corp. and Banc One Corp. are making two of the earliest efforts to move EDI to the Internet.

"Banks are trying to position themselves - and this is a very big business decision - as electronic marketplace makers to manage payments," said Barbara Riley, an analyst at Gartner Group, Stamford, Conn.

About 100,000 companies use EDI. Most of these rank among the nation's largest businesses.

The cost of using EDI can be high, but for the largest companies, expenses can be offset by operational improvements that come from reducing paper communications with trading partners.

At smaller businesses with fewer trading partners, operational benefits often are not large enough to warrant spending on private network-based EDI systems.

However, when EDI services flow over the Internet, costs drop.

For this reason, industry experts said, use of the Internet may be the key to attracting more small-business EDI users and to unlocking EDI profitability for banks.

Some banks and businesses have already begun to use the global public network to streamline business operations and save money.

San Francisco-based BankAmerica and Lawrence Livermore National Laboratory, a unit of the Energy Department that researched nuclear weapons, have conducted an Internet-based electronic data interchange pilot since August.

Lawrence Livermore, which cuts 70,000 checks annually, expects to save hundreds of thousands of dollars in operational expenses when the project hits full stride.

Using private key data security - the Data Encryption Standard - and public-private key technology from RSA Data Security Inc., Redwood City, Calif., Lawrence Livermore sends all its payment instructions to BankAmerica in one electronic mail envelope on the Internet.

The bank converts the E-mail into a file on its EDI system, then sends payments and remittance information to the receiving vendors' banks via the automated clearing house network.

Initially planned as a six-month pilot, the program was recently expanded, according to John Rhodes, project leader at the laboratory.

"We decided that we were giddy with success, so we decided to increase the number of vendors," he said.

The value of transactions in the project is gradually rising.

"Just last week we did payments to eight vendors, in one E-mail envelope," Mr. Rhodes said, for a total "over $375,000."

In another project, Columbus, Ohio-based Banc One is providing Internet- based EDI services to a provider of on-line periodicals and research information, Rowecom Inc., Boston.

Using security software from Open Markets Inc., Cambridge, Mass., Banc One acts as a clearing house for subscriptions to periodicals in Rowecom's catalog, called Subscribe '96, said Steven Dieringer, group product manager at Banc One.

"We exchange both the information and the money between the libraries and the publishers," Mr. Dieringer said.

Libraries enroll in the service by providing routing numbers and account information for their banks. Banc One, using Open Market's technology, issues a private electronic key to both publisher and library.

Orders are placed with the bank in standard EDI formats, then payment instructions and accompanying information are split: The credits and debits flow over the automated clearing house network, and invoices and related information are forwarded to the publisher over the Internet.

As many as 50 libraries are testing the service, Mr. Dieringer said, including those at the University of California at Berkeley and Ohio State University, Columbus.

Richard R. Rowe, who founded Rowecom, has a goal of processing up to 400,000 order entries annually.

That would be a modest volume, Mr. Dieringer said, because large libraries may order up to 40,000 periodicals at once, "but we charge on a per-item basis, so we get a piece of every one of those 40,000."

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