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Myth Busters – Escrow Accounts

    What is an Escrow?

    Escrow is a lawful idea portraying a monetary instrument whereby an outsider holds escrow cash for the benefit of two different parties that are finishing an exchange or entering a transaction. Being in escrow is a legally binding plan wherein an outsider or a third party (the partner or escrow agent/platform/specialist) gets and dispenses cash or property for the essential executing parties.

    Escrow accounts include escrow fees which are managed by agents who hold the funds or assets until receiving appropriate instructions or until the fulfilment of predetermined contractual obligations. An escrow account can hold money, securities, funds, and other assets.

    While this is an innovative and unique concept, which is fast gaining acceptance in the world, it is yet to be understood entirely as many myths are surrounding the world of escrow. We bust some of these misconceptions and bring you facts so you could take an informed decision.

    Escrow transactions: free from stress and worry

    But before we state the myths and facts, let us understand the nature of an escrow transaction. In an escrow transaction, the buyer and seller create an escrow account, which could be a “temporary” one for a short period, to hold their funds during the period of the transaction safely. The escrow provider holding funds from the buyer is a third party who is disinterested in the transaction. He acts as a custodian to the funds until completion of the deal when the buyer instructs the escrow provider to release the funds to the seller, subject to his satisfaction with goods or services delivered. The escrow provider, on receiving confirmed instructions from the buyer, then transfers funds to the seller.

    In this whole process, the escrow provider charges a fee or commission for holding funds. The escrow service is designed to protect the interest of both the parties by negating the possibility of default on payment obligations. While it ensures safety for the buyer, it also ensures that the seller receives his funds on completion of a transaction.

    Myths vs facts:

    Let us look at some of the myths and facts:

    Myth #1: The buyers often think that their money will be locked/frozen in the escrow account even if the seller is delaying the delivery of the goods or the property. It is a misconception that the buyer will neither get the goods or services nor his money back.

    Fact: An escrow account is entirely safe for use, and the money is never frozen. If the buyer is unhappy and wants to call off the deal with the seller, he can place instructions with the escrow account holder and withdraw his money from the escrow account.

    Additionally, in India, an escrow account is created temporarily for a period of six months or until the completion of the delivery of goods and services, whichever is earlier. After this period of six months, to keep the account operational, special permission from the RBI is needed.

    Myth #2: People often hold the notion that the money deposited by them in an escrow account is not safe and the escrow agent (third party) will use it for its own personal purposes without informing the buyer about it.

    Fact: The fact or the reality is that the money held in escrow is totally safe. As per the RBI guidelines, the escrow agents can only act with regards to the money they are holding after taking permission from the buyer and consulting with him or her. They cannot transfer the funds to the seller until they receive a go-ahead from the buyer and nor can they use it for their purposes.

    Myth #3: Another misconception that people sometimes have is that the escrow provider has a bias towards the other party (buyer or seller), who is known to them for a long time and they would have to bear a loss if they transact since the escrow provider has his allegiance to his old ally.

    Fact: An escrow provider is a third party which is indifferent to both the transacting parties, with no biases whatsoever towards any of them and are under the overall guidance of the regulatory framework.

    Myth #4: Buyers think that they will get monthly interest on the funds they have kept in the escrow accounts just like other commercial banks pay to their depositors.

    Fact: There is no interest either paid or received to any of the parties involved in a transaction; all escrow accounts are non‐interest bearing in India.

    Myth #5: There is a credibility crisis for the third party holding funds as people tend to think the escrow provider will abscond or run away with their money and they will neither get the goods from the seller nor the money they deposited with the escrow provider.

    Fact: The money you keep in an escrow is safe and. The escrow providers/platforms are under the overall guidance of the regulatory framework and if the escrows are non banks they typically partner with credible banks on the bank end.

    Myth #6: People tend to think that escrow services are just another type of fraud or a scam in the market. They prefer to hand over the money directly to the seller either upfront or after the delivery.

    Fact:  Escrow accounts are not Ponzi schemes, nor are they a scam or another unlawful method to mint money from unsuspecting consumers. An escrow account is a safety and security for your money which provides you with a hedge against downside or default by sellers. It is worth its weight in gold as it protects your interest and, indeed, safeguard you from bad eggs; it is certainly not a fraud in itself.

    On the contrary to this myth, Escrow increases your chances to protect yourself from scams and the possibilities of losing your entire life’s savings to fraudster parties. It is a highly recommended method to avoid falling prey to dubious sellers.

    Myth #7: People believe escrow would cost them a pretty penny or they would have pay through their noses a huge amount to the escrow service provider, which would be an added and needless expenditure.

    Fact: New age fintech platforms like us provide escrow focused payment solutions that are easy to set up and transact at a minimal fee. The safety and security offered for  your transactions far outweigh the small fee you might need to pay to set up and operate this account.