Escrow is an age-old concept, and a term unfamiliar to most, but is becoming increasingly popular across a wide range of industries. Predominantly used as a safeguard to ensure both sides of a deal are held up in a transaction, in its simplest terms, escrow is where money is held by a third party and released when contractual conditions agreed upon are completed.
The history of escrow
Escrow transactions have previously required the costly, lengthy and paper heavy involvement of a bank or a lawyer to set up designated accounts and act as the trusted third party and as intermediary between the parties involved in a transaction.
As a result, it has generally been limited in its use and application to the real estate sector, and in transactions where such costs and friction is a price the parties are willing to pay for the protection that escrow offers. It would not be practicable in most transactions to wait weeks for the transaction to be set up. Deals need to be done quickly and efficiently.
Technology has enabled the digitalisation and democratisation of escrow, meaning the use of it is now accessible to anyone for any transaction of any size, and is able to be set up instantly.
What can escrow be used for?
- Any transaction in which there is a lack of trust or regulator requirement for it
- Corporate payments – such as a merger and acquisition deal or investment
- Real estate transactions
- Deposits – for holiday homes to clothing rentals
- High-value marketplace transactions
- Luxury item transactions
- Medical supply transactions
- To ensure completion of services, such as construction tasks (see @Rated people)
- Auction houses – fund holding and completion
- Supply-chain management – manufacturers and distributors
- Freelancer websites
- Anywhere where there is risk in completing a transaction
How does escrow protect both sides of a transaction?
A typical real life example:
A buyer has agreed to buy a 2008 Mini Cooper on an online classified car marketplace. The price agreed upon is £4,000. The seller had previously had a minor crash but ensured the buyer it is has been restored and is in top condition.
For the buyer: There may be the risk something could be wrong with the car, or it’s not in the condition advertised. Prior to exchanging the cash, they would like to have the car checked and take it for a test drive.
For the seller: There may be the risk that the buyer does not truly intend to purchase the car; maybe they don’t have the money, or worse, they are posing with the intention to steal it (which sparked the idea for Shieldpay’s creation). The seller would like to see that the buyer is serious before allowing the test drive.
By placing funds into a third-party escrow account, legitimacy is proven and both parties have a much higher level of protection. When both parties agree to it, the funds are released from the account.
At Shieldpay, full identity-verification checks on both the buyer and seller take place before an escrow agreement can be entered into.
What if an escrow transaction goes wrong?
Because both the buyer and seller are willing to enter into the escrow agreement, our experience is that they have every intention to complete the transaction with full integrity.
If one of the escrow conditions is not met or one of the parties fails or refuses to release the funds from escrow, a dispute process is set in motion. Each party has a period in which they can negotiate and agree new conditions of release or, if they fail to come to an agreement, the decision will be put to a third-party arbitrator. Whilst the dispute process proceeds, the funds are held by Shieldpay. To date, we have experienced a less than 1% dispute rate.
What are the latest benefits of using escrow?
- Escrow can be set up instantly using online terms
- Full identity checks on all parties are undertaken digitally
- Money can be held in escrow for any agreed period of time between parties and all parties have visibility of funds
- Funds held are insolvency protected and held with tier 1 banks
- A single escrow can now be funded from any number of parties and can pay out to any number of parties
- Escrow payments can be fully integrated with marketplaces as a payment option for when a buyer or seller requires additional protection
- Escrow now applies across a wide range of verticals – the economic impact of Coronavirus has forced businesses to look for new ways of completing transactions whilst protecting themselves against liquidity issues of other businesses they might be dealing with
- Escrow has gone cross-border – enabling parties to transact large amounts with unknown counter-parties globally in total confidence
- Use of escrow enables transactions to be completed from anywhere where previously it may have required viewing or handing over of goods in person