Escrow-A Novel Mechanism in the Payments Ecosystem

Business transactions have traditionally been risky. Parties involved in business deals often struggle to transact in a safe, secure and seamless manner. In case one of the involved parties refuses to abide by the contract, the following litigation process can be long and arduous. India holds 163rd position in a group of 190 countries when it comes to enforcing business contracts.

Mr. Ashwin Chawwla

To resolve this conundrum, India needs to move on to an ‘escrow’ based payments mechanism that can ensure a fearless business environment in the country, making business deals litigation-free.

What is an Escrow account?

An Escrow account is a financial instrument in which an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction. Escrow accounts can hold money, securities, funds, and other assets. While it’s an age-old concept globally, it has so far been restricted to merger & acquisition deals. But with changing technology and the rise of internet-based economy, this instrument is getting democratized with stakeholders from several sectors using it to have safe and secure transactions.

How Escrow accounts are creating a payment ecosystem?

Escrow-based payments have been around for over 150 years and are not new. They have mostly been restricted to large transactions, like mergers & acquisitions, cross-border deals, etc. Setting up an escrow account is a complicated process but smart escrow service providersof today use ingenious technology to create easy-to-access platforms, democratising the escrow service as a safe and secure payment mechanism.

An escrow accountisemerging as a unique and novel mechanismwhich creates an added layer of transparency in the eco-system, helping build more trust.

Why involve a third party in a business transaction?

Usually in a financial transaction, the seller’s concern is regarding the assurance for receiving the payment, whereas the buyer is concerned about their investment and receipt of goods in sound condition. This requirement can be easily solved with the use of a digital payments process known as ‘escrow’. Using escrow, a buyer can place their funds in a bank-based escrow account which is supervised by a third party. The third-party disburses the funds from the escrow account to the seller only after all conditions in the financial agreement between the two parties have been met.

Restriction on withdrawals from an escrow account until the set obligations are fulfilled proves to be a powerful financial instrument that removes trust-based issues in sectors like real estate. Property developers, dealers and buyers have been regularly fighting an atmosphere of distrust in the real-estate market for the past many years. An average person who has ever rented a home through a property dealer, knows the pain of getting into a deal that is difficult to come out of without losing the upfront payment. Similarly, most dealers also struggle to get their full payment from the parties that take their services after the deal has been concluded. But, having an escrow system in place prevents such dubious occurrences.

The escrow system follows a step-by-step timeline which makes transactions speculation-free, as the transacting parties can track the movement of funds and progress of the contractual commitment. Since the transactions are conducted under the due supervision of diligent professionals, buyers’ funds and sellers’ offerings remain in secure hands. Minimising fraud, an escrow platform is also a very useful concept in the domains of intellectual property, law and automobile sector.

How can Escrow accounts help startups engage more customers?

Escrow accounts can prove to be extremely useful for the startups in securing their contingent-based transactions. For their specific-use transaction cases like procurement, supply chain, professional services, etc., startups and emerging businessescan leverage escrow payment methods to minimise risk.An escrow mechanism facilitates hassle-free, efficient and safe business transactions for the startups and helps in their seamless growth.

Having the government agencies perform regular audits also determines safety of operations for the escrow services. The regulatory push around escrow is headed in the desired direction where a more transparent online payments ecosystem needs to be created. What is needed is more awareness about the escrow facility among people, about how a temporary, tripartite financial agreement is helping two parties transact worry-free in a secure manner.

Views expressed in this article are the personal opinion of Ashwin Chawwla, CEO, Escowffrr.

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