Escrow is one of the most efficient ways of fulfilling a financial transaction. An escrow account can be defined as a temporary legal-financial arrangement of transaction between two parties, in which the funds are contained by a third party. This third party is a neutral entity that is usually an escrow service platform or a financial services institution facilitating escrow payments.
Escrow accounts are temporary, being operational only till the completion of the transaction. The parties involved need to deposit funds or documents with financial value in the third-party escrow account. For instance, they can deposit patents, deeds, legal instruments, licenses, written instruments, bonds, checks, or even mortgages for escrow transactions. Users of escrow are required to pay a certain amount as fees levied by the platform offering escrow services.
Now, for a transaction to execute agreeably or as per intention, it is mandatory to set up the terms of the agreement between the parties involved. These terms or conditions are fixed before entering an escrow payment. When the agreement terms are satisfied, the funds are disbursed by the third-party account to the seller. However, if the conditions of the agreement are not fulfilled, the funds held by the escrow account are returned to the buyer.
So, to answer the question – why escrow is used: it is primarily to ensure fraud protection, especially in high-value deals. It protects both the buyer and seller involved in a transaction.
What are the benefits of using escrow?
There are various benefits to using escrow payments.
- Establishes trust – The chief intention of using escrow is to ensure impartiality in the transaction by absolute fulfillment of the agreed conditions by both the seller and buyer. Besides, the intermediary that acts as the temporary custodian of the funds or assets is an independent impartial entity. So escrow transactions automatically create a greater level of trust among those involved.
- Preserves fairness – Escrow benefits both sellers and buyers. Instead of paying directly to the seller, the buyer deposits their funds in the safety of the escrow account, while sellers know that the funds receivable are already in the safekeeping of a neutral third party. This arrangement maintains fairness and peace of mind among both parties.
- Establishes secure, transparent transactions – The basic concept of escrow payments ensures the protection of both the seller and buyer. Escrow systems ensure fraud protection by disbursing funds or assets in its custody only and only if all the obligations are thoroughly fulfilled by the transacting parties. Modern-day escrow platforms like Uniscrow have taken this payment security several notches higher by implementing smart contracts and blockchain technology. As such, blockchain escrow systems can even maintain records of each transaction step that the involved parties can view and track easily.
- Supports personalized transactions – Escrow can be used in various industries and various cases, from real estate transactions to settling legal disputes, and more. So the obligations of agreement will of course differ in each scenario. In escrow, the advantage is that transacting parties can customize the payment fulfillment conditions as per their unique requirements.
- Offers buyer protection – If any of the involved parties fail to satisfy the pre-decided agreement conditions of the transaction, the funds held by the escrow account are returned to the buyer. For instance, if the seller fails to deliver goods or fulfill standards as per the agreement, escrow returns the money to the purchaser.
- Offers seller protection – In the case of B2B dealings, along with reduced transactional risks, escrow services also minimize chargeback risks. If the agreed terms of sale are not fulfilled by the buyer, they cannot get back the funds held in escrow until they return the goods to the seller as per expectations. So sellers also get the benefit of fraud protection by never having to bank on unreliable methods of payment or “good faith” of new customers.
- Timely mortgage payments – Mortgage escrow accounts can save the lender and borrower from bearing potentially late payment charges for home insurance and property taxes. Based on the monthly estimate of these expenses, the borrower can deposit funds in the escrow and make adjustments, as needed, instead of paying a huge lump sum or forgetting to pay at all.
How does escrow ensure security?
Nowadays, escrow platforms employ ultra-sophisticated technologies to ensure transparency, security, and fraud protection. A highly evolved form of escrow is used today, that packs in the power of blockchain technology and smart contracts.
Blockchain technology helps establish high-end security and transparency in high-value escrow payments. Smart contracts within blockchains act as neutral third-party accounts that temporarily hold funds. The pre-determined conditions of the agreement are coded into these smart contracts, which automate the logical flow of transaction execution leading up to completion. Blockchain enables the depositor to monitor the fund movement throughout the escrow transaction and also validate if all conditions of payment are fulfilled or not. Moreover, the option to reclaim funds in the case of unfulfilled contractual obligations offers an additional protective layer to buyers in a deal.
However, frauds in escrow are not uncommon. So it is imperative to trust only the best names in this field, like Uniscrow.
Whether for individuals or businesses, digital escrow accounts by Uniscrow implement highly complex cryptographic algorithms to facilitate secure transactions that can also be validated at any time. Uniscrow’s blockchain escrow services also support multiple fiat currencies and cryptocurrencies too, certifying the utmost privacy and protection across all transactions.