Few would disagree that innovation is core to the payments sector, where speed and ease has been the defining factor for decades. But today it’s no longer just about the speed of payment. From consumers to sellers, we all want to know we can trust the transaction, particularly with the threat of fraud now greater than ever as digital commerce continues to grow.
When it comes to facilitating trust and creating safer payments, for purchases ranging from clothes to second-hand cars and watches, an age-old payments facility can be reinvigorated for the digital age – escrow.
A brief history
The concept of escrow has been around for some time: the word first entered the English language in 1590, originating from the Old French word escroue, or a scrap of paper (on which a deed or title was usually recorded to be held by a third party). Given its age, it’s unsurprising that for most finance professionals, escrow is often seen as clunky, complicated and slow – a relic of real-estate transactions and trust funds.
However, taking the idea of escrow and implementing it with modern payments technology creates an elegant answer to the recurring problem of online fraud and money laundering.
The National Cyber Security Centre (NCSC) recorded 2.7 million online scams last year, a number that is four times higher than in 2020. Only last month, challenger banks were criticised by the regulator for seemingly not acting enough to reduce money laundering and fraud risks. Meanwhile, consumers are increasingly looking to second-hand purchases, refurbished device marketplaces, and seeking a stronger guarantee that their money is safeguarded.
And with the disruption to manufacturing from the pandemic, Brexit and other macro-economic events, marketplaces for everything from second-hand cars to builders’ supplies, have created a sellers’ market. With such significant sums changing hands, consumers will naturally be concerned about security and trust.
And yet, could it be that all of these very 21st Century problems might be elegantly resolved through a 16th Century idea?
A modern form of escrow
Holding funds in digital escrow as a core part of the payment engine, rather than an ad-hoc add-on for exceptional cases, can help merchants and buyers facilitate this new era of trust and navigate the rise in the threat of online fraud within the e-commerce space.
Using escrow for online purchases means that buyers can trust that their funds won’t be released until certain conditions are met – so they won’t end up out of pocket should the seller’s goods be mis-advertised or fraudulent. Meanwhile, sellers can rest assured that a buyer has passed identification and verification checks, and already transferred the purchase price into the escrow service, before they are required to send any goods.
This is true for all forms of escrow, but as the standard for the payments industry is instantaneous, real-time transactions, embedding digital escrow into a payments channel provides a frictionless, seamless solution. This instantaneous standard is widespread, but what marketplaces lack is a reliable intermediary to hold funds securely until the conditions for both buyer and seller have been met, if they want to minimise risk.
The benefits appear simple, but until recently the notion of escrow as an integral part of the payments engine was unheard of. Whether it’s protecting transactions between buyers and sellers on marketplaces, creating trust for high-value purchases, or providing a more elegant solution for time-sensitive transactions that need more than just straight-through processing, Chief Payments Officers, Chief Technical Officers or Chief Website Officers should all take note.
The answer to fraud-free payments channels for your business might stem from an old technology, reinvigorated for the digital age.
If you'd like to find out more, please reach out.
*First appeared in Payments Cards & Mobile 18th May, 2022. Available to read here.
Sources
https://www.gov.uk/government/news/public-urged-to-protect-themselves-from-online-sales-scams
https://www.sciencefocus.com/news/uk-online-safety-bill-explained/
https://www.independent.co.uk/tech/national-cyber-security-centre-action-fraud-nhs-b2075223.html
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