In this day and age, where the internet has become widespread and different kinds of transactions, including the purchase of goods and services, have gone digital, you might have heard the term escrow settlement.

Escrow settlement refers to a system for receiving and disbursing funds that enables the parties to a deal—the seller and buyer—to conduct the exchange with confidence on both sides. For example, when purchasing products through consumer-to-consumer (C2C) transactions on the internet, customers often worry about whether the item will actually arrive after they pay for it, or if it’s safe to pay the seller in the first place. The setup aimed at removing these concerns about the exchange of money is called escrow settlement.

This article explains the basics of this method, including how it works, key benefits, and some use cases.

What’s in this article?

• What is escrow settlement?
  
• Why escrow settlement is gaining attention
  
• Advantages of escrow settlement
  
• Case studies of services using escrow settlement
  
• Ensuring safe, fair, and transparent transactions
  
• How Stripe Connect can help
  

What is escrow settlement?

As explained above, the model refers to a system for transferring funds between a seller and a buyer, designed to bolster the safety and reliability of the exchange.

In business, an impartial external entity acting as the depository is known either as an escrow or an escrow service provider. This term is commonly used in real estate transactions, where the purchaser entrusts the purchase money to a neutral third-party institution, and the seller entrusts the documents, such as the property title deed, to the same institution. In other words, since there is no direct interaction among the buyer and seller, and the exchange proceeds through an independent escrow operator functioning as the intermediary, the two parties can conduct the sale comfortably regardless if there isn’t a sufficient level of trust established yet, as might be the case with a partner you’re doing business with for the very first time.

The role of escrow operators in online transactions is similar to that role in property sales: the intermediary initially takes in the money from the purchaser. The funds held by this intermediary are promptly released to the seller after the buyer has confirmed receipt of the goods without any issues. In this way, the use of escrow services in ecommerce allows businesses to avoid problems such as uncollected payments and undelivered items.

How it works

As mentioned earlier, escrow settlement proves highly effective in commercial exchanges. A transaction typically unfolds through six main steps:

• Completing the transaction: The seller and buyer carry out the sale exchange.
  
• Payment by buyer: The buyer deposits the purchase money with the escrow service provider.
  
• Notification of deposit: The escrow service provider notifies the seller that the buyer has paid.
  
• Shipping and receiving of goods: The seller ships the goods to the buyer, and the buyer receives it.
  
• Goods receipt notification: The buyer notifies the escrow service provider that the goods arrived without incident.
  
• Payment to seller: The escrow service provider transfers the funds held from the buyer to the seller.
  

Why escrow settlement is gaining attention

Escrow services have gained attention not only in business-to-business (B2B) transactions but also more broadly, with the rise of online trading, particularly in C2C exchanges. In C2C transactions among individuals, for instance those at flea markets and auctions, sellers often face risks, including nonpayment, while buyers frequently encounter issues, such as nondelivery or defective items. Third-party escrow services resolve each side’s concerns and help deals proceed smoothly and confidently.

Advantages of escrow settlement

Transaction safety is ensured

As you’ve now learned, the greatest advantage of this model is that it enables highly secure transactions for each party.

To illustrate, after the purchaser receives the goods and confirms there are no problems, the escrow operator then transfers the remittance to the seller. That said, if an item received differs from the one ordered or is defective, the purchaser can file a dispute with the escrow service provider.

Once the items are verified to be defect-free, the seller gets guaranteed payout, eliminating any risk of nonpayment.

Transparency of contract details

Under an escrow setup, the contract details are visible not only to the seller and buyer but also to the third party, ensuring the transparency of the terms. By assuring the transaction’s fairness, the escrow service provider protects each participant from unexpected issues.

For example, while this is not yet common in Japan, specialized property escrow offerings are important overseas, particularly in Europe and the United States, for high-value transactions such as real estate. These services support a highly transparent and fair contract process.

Problems are prevented

With any exchange, the goal is to avoid complications including misunderstandings arising from the transaction amount or payment deadlines due to careless communication among participants or other causes. When parties implement escrow settlement, a third-party escrow service provider acts as an intermediary, preventing disputes between them. Further, in the unlikely event of an issue, the provider acts as a mediator, offering neutral and appropriate support to resolve the matter.

Case studies of services using escrow settlement

Now that we’ve outlined how the model works in practice, let’s look at case studies of services that apply this approach today:

Mercari

Mercari, a tenant-based ecommerce mall operating Japan’s largest C2C marketplace, has introduced escrow settlement. In addition to fixed-price listings in a flea market setting, Mercari recently added an auction format, enabling sellers to choose the format that best suits their needs.

Generally speaking, in situations where individuals buy and sell products directly, such as at a swap meet or auction, risks are involved, including the possibility of not receiving an item or having it arrive damaged. However, on this platform, when a buyer purchases an item, Mercari temporarily holds the payment. The seller gets paid only after delivery is confirmed.

By adopting an escrow setup, Mercari has successfully avoided issues including deals that involve defective or counterfeit goods and has gained the trust of its users.

Buttask

Buttask, a matching platform that helps people find the most suitable priest for a Buddhist ceremony, such as a memorial service or funeral, as well as for purposes including warding off misfortune and making prayers, has also implemented escrow settlement. Buttask aims to eliminate the hassle of finding a monk, serving as part of the sharing economy. It connects monks with people based on various criteria such as legal affairs, sect, location, donation guidelines, skills, and personality.

After a match is confirmed, the intermediary processes the charge by credit card or bank transfer. After verifying that the monk completed the legal affairs, the platform releases the payout to the monk.

Ensuring safe, fair, and transparent transactions

We have explained how escrow operates, its advantages, and some case studies of services that use it.

An escrow framework serves to prevent disputes that could arise between parties, ensuring safety and fairness for the buyer and the seller when goods or services are purchased online, as well as the transparency of the transaction details. Especially when it comes to first-time exchanges, it’s not uncommon for users to feel uneasy about proceeding without an outside intermediary. It’s no exaggeration to say an escrow platform, where an impartial party mediates, can be indispensable.

As the ecommerce market expands and purchasing behaviors diversify, demand for escrow settlement continues to increase significantly in online checkouts. Therefore, businesses yet to adopt this method but seeking to strengthen transaction security and user trust through a multifaceted approach might want to consider it.

How Stripe Connect can help

Stripe Connect orchestrates money movement across multiple parties for software platforms and marketplaces. It offers quick onboarding, embedded components, global payouts, and more.

Connect can help you:

• Launch in weeks: Use Stripe-hosted or embedded functionality to go live faster, and avoid the up-front costs and development time usually required for payment facilitation.
  
• Manage payments at scale: Use tooling and services from Stripe so you don’t have to dedicate extra resources to margin reporting, tax forms, risk, global payment methods, or onboarding compliance.
  
• Grow globally: Help your users reach more customers worldwide with local payment methods and the ability to easily calculate sales tax, VAT, and GST.
  
• Build new lines of revenue: Optimize payment revenue by collecting fees on each transaction. Monetize Stripe’s capabilities by enabling in-person payments, instant payouts, sales tax collection, financing, expense cards, and more on your platform.
  

Learn more about Stripe Connect, or get started today.