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.
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.
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.
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.