Escrow Account


MEANING

  1. An escrow account is a third-party account where funds are kept before they are transferred to the ultimate party. It provides security against scams and frauds especially with high asset value and dispute-prone sectors like Real Estate.

  2. In other words, Escrow accounts are a financial instrument in which an asset or escrow money is held by a third party on behalf of 2 other parties that are in the process of completing a transaction. Escrow accounts can hold money, securities, funds, and other assets.

  3. This is a temporary account as it operates until the completion of a transaction process, which is implemented after all the conditions between the buyer and the seller are settled.


Why is Escrow Account Needed?

An escrow bank account is all about efficient risk management, simplification of complex transactions and facilitating custody of cash, securities and other collateral as per the transaction type. It is needed because of the following reasons: -

  1. Firstly, escrows are able to provide a safe and secure mode of routing cash flows for all parties.

  2. Secondly, an escrow account allows transactions to be customized to suit requirements of all the parties.

  3. Thirdly, top banks allow opening and operating multiple accounts for deals with waterfall mechanism.

  4. Fourthly, escrow banking comes with channel support. Dedicated escrow teams facilitate smooth operations in a big way.

  5. Lastly, with the emergence of the digital medium in a big way, an escrow bank account allows simplified documentation and online tracking.


Examples


Real Estate

Escrow is commonly used in real estate purchases. This safeguards the buyer, who will be able to check if the property being purchased is of the standard that was advertised, and that there is not a malicious attempt of the seller to scam him.

Online

When performing an online transaction, there is little transparency on who we are dealing with. For this reason, there are licensed online third parties who offer internet escrow services to safeguard both the buyer and seller.


Stock Market

Stocks are often issued in escrow. In this case, while the shareholder is the real owner of the stock, the shareholder has limited rights when it comes to disposal of the stock. For example, executives who receive stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock.

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