Escrow – What is it, definition and concept | 2022

Escrow is a service by which an operation or transaction is guaranteed. This, with the incorporation of a third party that verifies compliance with the agreements by the agents involved.

In other words, escrow provides greater security for a transaction. On the one hand, it confirms that there are sufficient funds for the agreed payment or payments. And, on the other hand, these disbursements are only made when the seller or supplier complies with delivering the good or service as agreed.

The objective of this type of agreement is to reduce the risk of default by the buyer and the risk of default by the seller.

Escrow can be used in different circumstances, particularly when the operation is not carried out in person or when large sums of money are involved.

How does escrow work?

The escrow works by delivering in custody the money involved in the transaction to a third person or entity outside the agreement.

Thus, the money is retained by this third party until the agreement is fulfilled. That is, it does not make the respective payment to the seller until the buyer confirms that he received the purchased product according to the agreed conditions.

What benefit does the seller receive? Well, it is ensuring that the buyer has sufficient funds to pay for the product and that they will actually be used for that purpose.

Escrow is similar to trust. This, in the sense that it incorporates a third party that guards a capital and ensures that it will be used for a certain purpose.

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escrow applications

Among the escrow applications we can find:

  • Online shopping: E-commerce platforms can implement an escrow service. Thus, an escrow account is established where the amount to be paid is withheld until the buyer confirms receipt of his order.
  • Real estate: In this sector, it is interesting that the third party involved can not only act as a custodian, but sometimes guarantee payment on time. For example, if periodic payments have to be made for rent, the third party ensures that this disbursement is made before the agreed due date. In addition, escrow can be used to safeguard the fund intended as collateral. The tenant or buyer of the property presents said guarantee as a guarantee to the owner of the property. This, in case the agreement is breached, that is, if the tenant stops paying the rent, for example, or if he causes damage to the property.
  • Crowdfunding/crowdlending: In this case, escrow is used to safeguard the money of investors or lenders. Thus, the funds are delivered to the collector when the campaign ends.

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