Escrow account

An escrow is:

The word derives from the Old French word escroue, meaning a scrap of paper or a scroll of parchment; this indicated the deed that a third party held until a transaction was completed.

Escrow generally refers to money held by a third-party on behalf of transacting parties. It is mostly used regarding the purchase of shares of a company. It is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow is an account separate from the mortgage account where deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance. The escrow agent has the duty to properly account for the escrow funds and ensure that usage of funds is explicitly for the purpose intended. Since a mortgage lender is not willing to take the risk that a homeowner will not pay property tax, escrow is usually required under the mortgage terms. Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay), although the advent of new low cost online escrow services has meant that even low cost transactions are now starting to benefit from use of escrow. In the UK, escrow accounts are often used during private property transactions to hold solicitors' clients' money, such as the deposit, until such time as the transaction completes. Other examples include:

An unrelated type of escrow is when a purchaser of a complex system, such as bespoke process control software or a large industrial installation, may require the supplier to place the design into source code escrow, so that the purchaser remains in a position to maintain and modify the system in case of the demise of the supplier.

Internet escrow has been around since the beginning of Internet auctions and commerce. It was one of the many developments that allowed for trust to be established in the online sphere.

As with traditional escrow, Internet escrow works by placing money in the control of an independent and licensed third party in order to protect both buyer and seller in a transaction. When both parties verify the transaction has been completed per terms set, the money is released. If at any point there is a dispute between the parties in the transaction, the process moves along to dispute resolution. The outcome of the dispute resolution process will decide what happens to money in escrow. With the growth of both business and individual commerce on the web traditional escrow companies have been supplanted by new technologies.

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Wikipedia