Secure payments are everyone’s top concern. Especially when it comes to high-value international transactions. In global trade, buyers and sellers are in different countries and are subject to different laws. Think export/ import payments, mergers & acquisitions, investments, or real-estate payments. As such, it becomes necessary to protect yourself from risk and to secure payments that involve large sums of money. Perhaps you would prefer to receive an advance payment but do not want to obtain a letter of credit. In that case, an escrow service could be a viable option.
What Is an Escrow Service?
An escrow is a financial arrangement that a third-party provider manages for two business parties. When a buyer makes a purchase, they pay the third party rather than the seller. The third-party provider receives and disburses money on behalf of the transacting parties based on mutually-agreed terms. The funds are kept in a government-licensed escrow account. Escrow services are ideal for high-value purchases like property, yachts, electronics, fine art, property, and cars. Both buyers and sellers can protect high-volume payments by placing the funds with a trusted third party. This reduces the potential of risk and provides a more secure buying experience for all.
Why Do You Need It?
You have to minimize the risk when selling high-value goods or services to a new customer with no payment history. You could ask for an advance payment, but this usually is the least attractive option for the buyer. The customer might find it difficult to make the payment upfront because of cash flow issues. Or they might not trust a seller enough to pay in advance. Asking for advance payments also limits your ability to compete in a global marketplace. If you are the buyer, you might not be comfortable paying in advance before inspecting the goods. Or, you might not be sure if the seller is legit.
How does Escrow work?
Escrow allows a third-party service provider to hold and manage your funds safely. Moreover, the service provider ensures all buyers and sellers are verified to protect all parties from false claims. As the buyer of goods and services, you can inspect your purchase before the funds are released. Only after you approve the purchase, does the service provider disburse the funds from the escrow account to the seller. You don’t have to worry about payment fraud or failures. If you are the seller, you can stay assured that the funds are available. Though you cannot access it until all terms agreed upon by both parties are complete. Once done, you receive your payment securely without risks of chargeback.
Working with an escrow account follows a step-by-step process:
- The first step is to open an escrow trust account where the funds will remain in the form of payment deposits or assets.
- A transaction starts when both the buyer and the seller agree.
- The buyer then submits a payment to the escrow service provider by an approved payment method.
- The seller receives a notification once the payment gets approved. The seller then proceeds with dispatching the merchandise and submits the tracking information.
- Once the buyer receives the goods, they can approve or decline them.
- Based on this, the payment is forwarded to the seller or kept on hold until the dispute gets resolved.
How Escrow Services Benefit Business Owners
Escrow services allow you to safely make payments that involve large amounts of money. You work with a service provider who meets all regulations and compliances. As such, your fund management is secure and transparent. Further, it enables both parties to complete a transaction in a secure and hassle-free manner. The service provider follows full KYC and verification processes, and they will give you all the related information about the concerned business party. This, in turn, mitigates the risks associated with cross-border payments like payer risk, regulatory issues, or enforcement risks. Additionally, the escrow fee is paid in full by one party or split evenly between the buyer and the seller. This way, you avoid extra costs. As a buyer, you can remain assured of securing goods and services without any flaws. When you use an escrow account service, you can better manage your business’s finances and revenues.
How can Novalnet help?
At Novalnet, we securely manage your funds using insolvency-proof trust accounts. We hold your funds in these trust accounts and make payments directly from them. This ensures that your funds are 100% secure and protected against insolvency. The settlement via an escrow account maintains zero risk of non-payment by Novalnet. We can also open escrow accounts for your resellers, partners, or affiliates. With our integrated affiliate management solutions, your partners can also benefit from escrow account management.
Novalnet is subject to the strict regulatory requirements of the German Federal Financial Supervisory Authority (BaFin) and the German Bundesbank (DBB). This means we comply with numerous regulations and compliance measures, which are verified and documented by BaFin, DBB, and auditors. Our risk management solutions and data processing systems ensure adherence to the requirements of the Money Laundering Act (AMLA) and Regulation (EC) No. 1781/2006.
Jose Augustine is the Chief Business Development Officer at Novalnet AG with extensive experience in European payment industry and a knowledge powerhouse.