Payment Options for Export Import Trade Part III - Escrow - Essential Information

Role of intermediary is extremely important in any buy-sell transaction. Traditionally, banks have played this role, and are still considered most reliable option in export import trade.

However, on-line world brings fresh challenges that traditional paper-based systems find hard to adopt. The anonymous world of Internet demands more proactive role for the intermediary than mere checking or exchanging papers.

Necessity, as they say, is the mother of invention. Though, 'escrow service' is not exactly an 'invention' (it's been around for hundreds of years) - its on-line avatar is certainly an innovation that overcame many shortcomings of traditional payment options in on-line environment. Besides being inexpensive, escrow offers extra safeguards for both buyer and seller that traditional payment options do not provide. As a result, on-line escrow service has become extremely popular among Internet users, specially those using on-line auctions.

What is Escrow Service ?

Origin of the word is French 'escroue' or 'escroe' - which means strip of parchment. Dictionary meaning of escrow is 'Money, property, a deed, or a bond put into the custody of a third party for delivery to a grantee only after the fulfillment of the conditions specified'

In on-line environment, an escrow service acts as a third party or intermediary for buyers and sellers who have reached an agreement on an item for sale. The escrow service will hold the payment in trust until the buyer inspects and accepts the merchandise. Once the buyer is satisfied, the escrow service will release the payment to the seller.

So, online escrow services provide a third-party intermediary to ensure buyers and sellers fulfill business agreements. Instead of paying a seller directly, buyers pay an escrow company, which then shuttles the payment to the seller - only after the buyer receives and approves the goods

How on-line escrow service works:

Here is a step by step description of how escrow service works

  • Step 1 Buyer and seller meet over Internet, typically in an auction site, where seller has put up his/her product for sale.

  • Step 2 Buyer decides to buy seller's item, places his/her bid

  • Step 3 Seller accepts buyer's bid. Both agree to terms of the transaction including the price of the item and shipping costs.

  • Step 4 Buyer sends the agreed amount to the escrow service

  • Step 5 Escrow informs seller payment is received in full

  • Step 6 Seller ships the merchandise to buyer

  • Step 7 Buyer receives the merchandise and inspects quality

  • Step 8 Buyer approves the merchandise and informs the escrow

  • Step 9 Escrow then pays the seller after deducting its commission

We shall discuss how escrow safeguards both buyer and seller in next issue.

Happy and Safe Surfing

Dr. Amit K Chatterjee

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Source: FAIDA - Newsletter on Business Opportunties from India and Abroad Vol: 4, Issue 22 ; Jan 29' 2004

Author : Dr. Amit K. Chatterjee
(Amit worked in blue-chip Indian and MNCs for 15 years in various capacities like Research and Information Analysis, Market Development, MIS, R&D Information Systems etc. before starting his e-commerce venture in 1997. The views expressed in this columns are of his own. He may be reached at )

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