How escrow provides security for buyers and sellers on a marketplace

An online marketplace or platform must be a secure environment for trading. If trading results in a positive experience, it will attract more buyers and sellers, resulting in a growing platform. Condition is that a product or service must actually be delivered. If this is not the case, the trust of buyers will decrease and they will be less likely to trade on your platform again. This is exactly where escrow can play an important role. Read more about what escrow entails, why using escrow is important and the areas of concern when integrating escrow into your marketplace or platform.

What is escrow?

Escrow is a method that provides users of an online marketplace or platform with a safe and secure trading environment. With an escrow payment, the buyer's money is held by a third party (usually a Payment Service Provider) until the seller has fulfilled his obligation (send the package). For large sums of money or risky logistical processes, escrow agreements with a notary have been commonplace. Fortunately, the rise of smart technology allowed platforms and online marketplaces to eliminate the need for a notary or a cumbersome procedure.

A well-known example of an escrow application for low transaction values between consumers in the Netherlands is the 'Equal Crossing' option on Marktplaats. The seller sends a payment request, which is fulfilled by the buyer straightaway. The PSP verifies the seller and holds this payment until the product is delivered. It is easy to use, but very effective. In a letter on Internet fraud that Minister Grapperhaus sent to the House of Representatives in 2018, he states that this option 'greatly reduces the frequency and risk of fraud cases'.

Escrow in case of bankruptcy

But integrating escrow into your marketplace or platform is not only recommended when selling products. With a closed third-party account, platforms that offer services also include security for both supplier and buyer. Let's say, you hired a contractor via a platform (provider) that will refurbish your house. You could for example ensure that he will only be paid if he has actually visited and performed the desired service.

Even if a platform is not performing well, escrow is a smart solution. A recent example is Plugify, an online platform where you could easily book artists. For consumers, it was easier to find the right musical accompaniment for their party or event. At the same time, artists could increase their visibility on the web. A win-win situation, until the platform was declared bankrupt. Because Plugify was using a platform-PSP, the payments were held in a third party account. In essence, the money was stored and could not be claimed by the trustee (recipient) in any way, for example, to submit payments to creditors. If the money was held in the bank account of the platform itself, this would have been possible.

The importance of escrow becomes even greater when the company finds itself in a crisis. Now it is even more likely that more companies will fall apart due to the corona crisis, it is particularly important to integrate escrow into a platform. In fact, in the event of bankruptcy, it is not enough for a platform or marketplace to make use of a regular payment service provider or to make use of a 'third-party account'. This can only be done by a platform-PSP, in other words, a payment service provider specialized for marketplaces and platforms. 

Integration escrow and legacy

If it is that relatively easy and if it offers that additional security, why doesn't every online marketplace or platform use escrow? To use just one metaphor: it's not easy to replace the engine when the airplane is flying. Many online platforms, and especially webshops, offer certain payment methods that are difficult for splitting payments. If a consumer has three items in his basket, but one item is not delivered, the consumer wants to be able to apply escrow for that one product. It is not easy to integrate processes like these on your platform without disrupting operations or affecting the customer experience.

Does it sound complicated? Our technology and experience will make it crystal clear so we'll get you off to a flying start with escrow!