In April 2012, Professor David Wyld, Robert Maurin Professor of Management at Southeastern Louisiana University, wrote an article titled "Securing the Transaction: The Advantages of Using Online Escrow Services Versus Letters of Credit in International Trade." In that article, Professor Wyld predicts that with the use of escrow services "we will see a growth in exporting (and importing) activities around the globe."
By definition, an escrow service reduces the potential risk of fraud by acting as a trusted third party that collects, holds and disburses funds according to exporter and importer instructions. Here's how it works: the importer sends the agreed amount to the escrow service. After payment is verified, the exporter is instructed to ship the goods. Upon delivery, the importer has a pre-determined amount of time to inspect and accept the goods. Once accepted, the funds are released by the escrow service to the exporter. The escrow fee can either be paid in full by one party or split evenly between the exporter and the importer.
Per the Trade Finance Guide (TFG), published by the International Trade Administration, as an exporter, any sale is a gift until payment is received. And, because getting paid in full and on time is the ultimate goal for each sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. But, as illustrated in the TFG, not all payment types are created equal. And for a variety of reasons, not all of the above methods of payment are available, or desirable, to either Exporters or Importers. Here's how the risk levels are illustrated in the TFG:
However, and for the first time, the new 2012 edition of the TFG includes escrow services for "transactions with importers who demand assurance that the goods will be sent in exchange for advance payment" and states that "Escrow in international trade is a service that allows both exporter and importer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions are met." So based on that, the chart shown above may look like this:
What escrow services provide are the only method of payment that offers "equality of risk" for both parties - something not found with the more traditional payment methods. Plus, adding escrow services as a method of payment can actually add more potential importers to US exporters. In many cases, deals just don't happen due to a payment related "issue" - and one example might be that you, as the exporter, require payment in full and up-front but the importer is reluctant to send the money until they receive the goods. In this case, by offering escrow services, both parties can be satisfied, the payment issue is resolved, and the deal closes. A no-risk solution/win-win solution.
Like with any new business opportunity, if you are considering the use of escrow services, do your due diligence and make sure the one you choose is licensed and accredited. You can also verify the service you choose to do business with via:
- The Internet Crime Complaint Center - a JV between the FBI and the NWC3 (National White Collar Crime Center) to prevent fraud
- The Better Business Bureau
This piece was written by Andrew K. Sokol is General Manager of Emerging Markets at Escrow.com, a U.S. Commercial Services Strategic Partner. To learn more about Escrow services in general or his firm more specifically contact Andrew Sokol at email@example.com.