Escrow payment service ensures that seller gets paid for shipment
and buyer receives what has been ordered for. Thus, it reduces potential
risk of fraud by acting as a trusted third party that collects,
holds and disburses funds according to buyer and seller instructions.
Escrow services are provided by licensed and regulated escrow agents.
When Escrow Service is to be used ?
Escrow is well suited for small to medium value merchandise or intellectual
property where conventional payment system (e.g. letter of credit)
is either unsuitable or un-economic. It is typically used for items
purchased on auction sites, Small value shipments, domain names,
source code etc.
Tell me one good application of Escrow for
Exporters can use escrow for collecting payment of small export
shipment where buyer is unwilling to pay in advance and Letter of
Credit is an expensive option.
It is frequently used for first-time transaction where buyer and
seller are conducting business for the first time (consequently
mutual trust level low) and the value of shipment is small.
Another area is collection of payment for samples that exporters
send for approval. Still, a third area could be payment for domain
name or source code for service exporters, specially in software
For exporter, escrow is safer than receiving payment through credit
card, as there is no scope for 'chargeback'. For importer, paying
by credit card to an unknown party always entails some risk. A credible
intermediary can help buyer and seller to start business and build
trust in each other.
How Seller is Protected
The financial risk of seller in an international transaction is
greatly reduced in escrow payment as buyer has to deposit the agreed
value of shipment with escrow before seller ships the ordered product.
So, seller knows buyer has capacity to pay and has already paid
for the shipment.
How Buyer is Protected
Escrow service tracks the shipped merchandise and verifies that
it has been delivered to buyer. Buyer then has an inspection period
to check the merchandise and decide its acceptability. The seller
isn't paid until the buyer accepts the merchandise, or the inspection
What Happens If Buyer Refuses to Accept the
Different escrow services may follow slightly different procedure
in this respect - I am describing below a typical one:
If the buyer is not satisfied with the merchandise, he/she can inform
escrow service that the goods will be returned to the seller. It
is now the responsibility of buyer to ship the merchandise back
to seller in good condition and pay seller his/her cost of shipment.
The seller has an inspection period to verify that the returned
goods are in original condition. After the seller has confirmed
the receipt and that the condition of the goods are to his/her satisfaction,
escrow will return buyer's funds after deducting seller's shipping
costs and the escrow fees. The seller will then be reimbursed for
his/her shipping costs.
So, in the instance of buyer refusing to accept merchandise, he/she
will have to bear the cost of shipping back the merchandise to seller,
reimburse seller his/her shipping cost and pay escrow fee.
If the buyer fails to inform escrow of his/her decision within the
inspection period - escrow service will make the payment to the
Happy and Safe Surfing
Dr. Amit K Chatterjee
- Newsletter on Business Opportunties from India and Abroad
Vol: 4, Issue 23
; Feb 5' 2004
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 firstname.lastname@example.org