by Anna Tsyupko, CEO, Paybase
Escrow is undergoing a renaissance. As the platform economy grows, escrow’s ability to safeguard it is even more valuable.
According to a recent Forbes article, “The job of a platform economy business is to enable two strangers to transact without any friction, while ensuring the transaction is safe.” This tension, it argues, comes as a result of growing consumer expectations. Given the consumer-to-consumer (C2C) nature of much of the platform economy – gig or sharing economy platforms, online marketplaces and fintechs – it is perhaps not surprising that payments security is one of the key hurdles for platform businesses to overcome. However, streamlining security and user experience can be difficult. Today, there are various options available to fulfil these consumer demands, one of which is escrow. We investigated escrow’s potential in the platform economy and what’s caused the instrument to break into mainstream use. Click here to read our full whitepaper.
What is escrow?
Escrow is the act of holding funds in a third-party account when a payment is made. Once the transacting parties are happy, the transaction can be authorised and the funds released.
The journey of escrow, and its modern renaissance. Video by Paybase.
Escrow has been on a turbulent road from its creation to now. It began life on the property market in the 1930s as a manual, legal process – 70 years later, the advent of the internet introduced digitised escrow, triggering a pattern of scams that severely dented its online reputation. Now in its third iteration, escrow has been tried, tested, developed and safeguarded by innovative payments providers, and it is finally ready for democratised use.
“It’s not just about increasing trust for the consumer, it has to be built for the provider/lender as well,” says Nick Ismail in this piece for Information Age. Escrow runs on a trust capital, which means that it enables platforms to build trust not just in their transactional framework but in their brand as well.
What’s trust got to do with it?
Security is not the only selling point for escrow’s trust capital. It is also a strong mitigant for disintermediation – when buyers and sellers use a platform to connect but transact off-platform. For gig economy platforms especially, escrow can be used to encourage user loyalty by guaranteeing payment for the gig worker and quality of work for the employer – for example, by combining escrow with features such as insurance.
It can also be used to set up project milestones on large projects which can be split into smaller tasks that are approved and paid for as they are completed. This is a great way for gig workers to ensure they get paid regularly for longer projects, and for employers to ensure they get every milestone of a project successfully completed before having to release funds.
End-to-end dispute resolution is another good feature. Thanks to innovative payments providers, platforms have access to a level of flexibility that enables them to hold, divide and return funds according to their needs. For example, if a marketplace item is received more than a week late, a platform could send 75 per cent of the funds to the seller and return the remaining 25 per cent to the buyer. This protects consumers from poor buyer/seller practices, eliminates the need for a separate customer support process and helps platforms to secure their transactions and instil trust in their business.
What does the future hold?
Thanks to disruptive modern payments providers, digitalised escrow is able to combine strong security with even stronger user experience, perfectly catering to the demands of the modern consumer. Chris Wessels, CTO of Paybase, explains: “Escrow gives platform businesses a crucial tool to secure payments. It eliminates the need for trust between platform users by instilling trust, instead, in the platform itself. Our escrow solution goes further still. Built with flexibility at its core, it enables our clients to mould escrow exactly to the demands of their verticals and to stay ahead of ever-rising consumer expectations.”
As popularity and awareness of escrow grow, so too will its capabilities. Now strong enough to withstand its former vulnerabilities such as traditional scams, escrow in its digitalised form has equipped the platform economy with a competitive instrument to both safeguard transactions and enhance products. When used to its full potential, we predict that escrow could become the defining feature of a platform business, enabling it to stand out in today’s heavily saturated market.
Read more about the future of escrow here.