Basic Principles of Escrow

In this post we are going to explain you EXACTLY what escrow is.

A buyer wants to buy a laptop that he has seen at a second-hand marketplace.

He contacts the seller, they agree on a price but…

who takes the first step?

The seller doesn’t want to send the product before he knows he will be paid and the buyer doesn’t want to pay before he knows he will receive the laptop.

To put an end to this type of situation, which can also occur when contracting services, and not to enter into an exercise of blind faith, escrow was born.

Below we will explain everything you need to know about escrow, the most reliable payment method in the world.

So… what escrow is?

Escrow, also known as a trust or escrow account, is a form of payment that is used to assure the seller that he will be paid and the buyer that he will get what he paid for.

Here’s how it works:

The buyer makes the payment.
The money from the payment is not paid directly to the seller but is stored in a secure external account.
The seller is informed that the payment has been made.
The seller sends the product or performs the service.
Once the product arrives at its destination or the service is performed successfully, the payment is transferred from the external account to the seller’s account.

Can you see how powerful it is?

Let see practical uses of escrow

The escrow method is a widely used payment system in the United States and is spreading through Europe at breakneck speed. It is used in many different businesses and more and more companies are choosing an escrow account to ensure that purchases (or other transactions) are secure.

The most common applications today are:

Internet shopping. Online stores, especially if they are not very well known, have to gain the trust of the buyers. By having escrow as a form of payment they are telling their audience that they can be trusted.
Buying and selling in the Marketplace. When a marketplace not only brings sellers and buyers together but also offers escrow as a form of payment, the fact that both parties are private and unknown does not matter.
Real estate law. Both to avoid sudden changes in the contract and to make regular payments, it is a totally reliable system.
Computer services. For example, in companies that develop software, which deposit in the escrow account a copy of the source code with which they could continue working even if the developers decided to disappear with it.
Buying and selling of companies. As these are very large amounts of money, a small percentage is usually kept in an escrow account as a guarantee.

What is an escrow agent

The escrow agent is the impartial figure who takes custody of a deposit, usually of money, to ensure that the conditions of a deal between two parties are met as agreed. This agent is usually a bank or a notary.

Examples of successful marketplaces that use escrow

In Truust we take care of creating a customized escrow API to be implemented in Marketplaces so that your users can buy and/or sell in a totally secure way.

There are many Marketplaces that also use escrow and thanks to this payment method have achieved worldwide success. This is the case of:

Blablacar. Payment is made to the driver once the site has been reached. This eliminated problems that were common until then, such as drivers not showing up and leaving passengers stranded.
Airbnb. Although many users do not know it, when they pay to stay in a house their money is not entered directly to the host. The host will only be charged when 24 hours have passed since the guest’s arrival and everything is correct. The Airbnb case is a success story worth analyzing.
Freelancer. This is a job platform that brings together professionals who perform a service with people who need it. The contracting party pays and the money stays in a deposit account. If everything is as agreed, the payment is transferred to the professional who has performed the work.
eBay. The largest auction site on the Internet has among its payment options the possibility to pay by escrow. Whoever chooses it knows that he will receive the package or, otherwise, the money will be returned to him, as it is stored in a secure account.

Comparison between Escrow and PayPal

On many occasions, especially when talking to individual buyers or sellers, PayPal is considered the most reliable method of payment and collection.

However, in a simple comparison with escrow, you clearly lose out.

PayPal works in a similar way to a normal bank transfer. You have to pay in advance and jump into the void trusting that the seller will keep his word and send you what you have agreed to.

The only advantage over transfers is that you do not have to provide sensitive data such as bank account number to the other party.

In case the seller does not fulfill his part, either because he never sends the package, or because the product is in bad condition, or is different, etc. there is the possibility of opening a dispute at PayPal, although it is not at all agile.

It can take up to 180 days to make a decision, in which many times you can’t prove who is right and it ends up being a toss-up.

The only disadvantage of escrow over PayPal is that the seller takes longer to collect. However, this is for security purposes and to give confidence to the other party in the transaction, so it should not be seen as a negative thing.

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