Everything from ordering groceries to attending educational courses to hailing a cab is now possible through online shopping and payment. However, reliable and efficient backend operations are required for this convenience. A number of parties, including buyers, sellers, vendors, logistical partners, and payment processors, must work together. And money must be transferred from customers to all of these stakeholders in order for a business to succeed.
Virtual and Escrow are two distinct types of bank accounts designed specifically to handle the difficult money transfers that internet merchants must deal with.
Before the advent of the internet, have you ever heard the term "Escrow"?
Escrow is thought to have been utilized as far back as the Middle Ages. Escroe was the term for a tiny scrap of paper, parchment, or other material that served as a deposit of trust or security and was held by outside parties until a later condition was met.
The main goal of an escrow account is still to establish confidence and security in online transactions. A temporary vault of funds maintained by a dependable third party on behalf of two parties engaged in a transaction and governed by a contract is known as an escrow account. Escrow accounts are typically used in the following situations:
- when a seller and a buyer have never met
- when the agreement is intricate and prolonged
- when the contract's payment and value are substantial.
- where payment is required based on the project's progress toward completion (Eg. a real estate purchase)
Online commerce also makes use of escrow accounts. When the buyer is entirely unknown to the seller, escrow reduces any potential danger. An escrow account is advised, for instance, if you were purchasing used furnishings from an unidentified seller.
The escrow serves as buyer protection and protects you from financial loss due to subpar, damaged, or delayed goods or services. As a result, it lessens the possibility of disputes or chargebacks for the vendor.
This is how an escrow transaction flow would seem
Generally, banks and financial service companies act as escrow agents and charge a fee for escrow services. Before signing up with an escrow agent, make sure to read the terms and conditions thoroughly.
Also, read - Where do you require to have an escrow account?
Due to their short turnaround times, digital escrow services are proven to be a boon in both domestic and foreign markets. Escrow services have historically been a part of the solution package offered by all banks, with the drawback of a longer setup and processing time. Currently, digital escrow is available, allowing P2P parties to establish accounts and streamlining traditional procedures through online KYCs to enable seamless commercial flows, particularly for online marketplaces.
Digital escrow service in India
Digital escrow services are offered by many companies in India. Among the most trusted is Vouch. Vouch’s Digital Escrow service is a transparent way for buyers and sellers to build trust and secure a clean transfer of product and payment.
Virtual accounts are distinct account numbers that are assigned to traditional, physical bank accounts, also known as settlement accounts. They can be used to send and receive money on behalf of the settlement account, which ultimately holds the funds. Businesses frequently set up multiple virtual accounts, each one dedicated to a different client, transaction, entity, or other business reason.
How do virtual accounts function?
Virtual accounts work in the same way that traditional bank accounts do. They have their own account numbers, help users maintain their balances, and streamline incoming and outgoing transactions. The most notable distinction is that virtual accounts cannot hold money. They receive it, gather the necessary sender information, and forward it to a primary account.
They usually work in two ways:
1. Escrow Account-based Virtual Accounts
Escrow accounts are those in which funds are held by a third party with the parties' agreement. The funds are held by the third party until they are transferred to the payee. As a result, the duration is only temporary. For the transaction to be finalized, both parties must approve the transactions. As a result, it ensures transaction legitimacy and reduces the likelihood of fraud.
2. Addition of Virtual Accounts to an Existing Account
As the name implies, a current bank account is required to open a virtual account. The merchant can identify the payer by using the virtual account number. Its API also provides a view of the current transactions.
Because of this feature, it has gained popularity among NBFCs. They, like other businesses, can keep track of the borrowers' payments. It assists them in identifying and managing their non-performing assets (NPAs). It also makes it easier to calculate and collect owed interest.
Banks are subject to a slew of regulations. As a result, they will need to hire an attorney. A virtual account, on the other hand, handles this as well. It can comply with legislation due to its advanced characteristics.
For more information on virtual accounts read, What is a virtual account? - All you need to know.
Because of the complexities of the business world, all three - nodal, virtual and escrow accounts have come into play. Each has its own set of rules that are designed to make doing business easier and more transparent.