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.
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
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 export.
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 period expires.
What Happens If Buyer Refuses to Accept the Merchandise ?
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 seller.