Digital escrow: New ways of facilitating commerce

Philip Panaino Global Head of Cash Management

23 Sep 2021

Commercial relationships can be constrained by risk and complexity. The good news is there is now a solution that will help businesses keep up with this trend and the new opportunities it brings.

The surge in ecommerce sales shows little signs of slowing and is expected to hit $4.2 trillion this year. Commercial relationships however can be constrained by risk and complexity. The good news is that there is now a solution that will help businesses keep up with this trend and the new opportunities it brings. Philip Panaino, Global Head of Cash Management, Standard Chartered, explains.

Risk, complexity, cost, process inefficiencies and the resulting delays can all impose constraints on the free flow of trade. But the world is speeding up with the unstoppable roll-out of digital commerce, and buyer and seller expectations of a friction-free experience are rising with the growth of online marketplaces.

While the promise of these digital marketplaces is significant, the reality can be challenging. Many large corporates are setting up marketplaces but are not prepared to handle the funds exchanged on the platform, due to complexities around accounting, taxation and in some cases the requirement for a payment services license.

Meanwhile, small and medium-sized enterprises (SMEs) using B2B marketplaces face confidence issues from their trading partners: Will the business deliver? Will they remain credible? Will they pay? Partner due diligence currently relies on scant digital cues, says Panaino, meaning that SMEs have limited access to credit and require advance payments, especially in a cross-border trade context.

Irrespective of business size, unsecured trade finance requiring funds to be paid upfront is a huge risk for the buyer. Yet without sight of funds, the seller is exposed to considerable risk too. Further friction can be caused by a mountain of slow, costly, paper-based transaction processing in many markets.

But there is a solution, says Panaino: digital escrow. As the name suggests, its roots are embedded in its traditional counterpart but is very much a modern proposition.

A solution for the new economy

Escrow is essentially a contractual arrangement in which a trusted third party, recognised by all counterparties, acts as an administrator of a payment workflow in a commercial transaction. The escrow agent ensures all agreed terms and conditions are met by both sides before funds are released.

Historically, this arrangement has been used with great success in M&A deals, real estate, and joint venture transactions, but can be time-consuming and expensive to set up. Now, digital escrow has arrived. This solution mitigates many of these issues, including those arising from the commercial trust gap and the process inefficiencies that inhibit smooth commercial flows, especially for online marketplaces.

Digitisation of escrow also means new and simpler ways of accessing the product at the point of need. Standard Chartered’s recently announced MoU with Tazapay facilitates a seamless front-end user experience, and integrates with B2B marketplaces in multiple formats, says Panaino.

How digital escrow works

For enterprise marketplaces, the solution embeds a digital payment workflow into the marketplace experience that is governed by an appropriate legal framework, with funds held in a neutrally owned account by a trusted financial intermediary.

For SMEs, the solution offers a comprehensive ‘trust infrastructure’ comprising:

• Data services such as business verification, sanctions, and credit history
• Digital sign up and exchange of documents relating to KYC, escrow, transaction, and shipping
• Simple milestone/performance-linked payment workflows, administered by a trusted third party
• On-demand visibility of transaction status

Benefits of digital escrow

• Funds held in escrow are protected from insolvency of either party due to neutral ownership of funds
• Due diligence from an independent party to help determine that a commercial counterparty is a credible partner
• Payment upon performance or fulfilment of predefined criteria, e.g. delivery vs. payment
• Flexibility around different payment workflows e.g. milestone-based staged fund ins or pay-outs, payment on inspection or delivery.
• Ability to work in tandem with working capital financing products e.g. financing the buyer to fund escrow

Stronger together: the benefits of co-creation

In addition to providing enterprise marketplaces and payment service providers with advice, Standard Chartered co-creates safeguard solutions with clients through its new eCommerce pay-outs platform, the Smart Contracts Suite. This enhances the trust end users have in clients, as the funds from end users will be operationally controlled and legally protected.

Co-creating with a bank brings about several benefits such as access to a wide network of markets, a compliant and technically advanced solution and safeguarding of funds by a secured counterparty, notes Panaino.

Treasury gains

“Digital escrow provides users with a viable alternative settlement method when conducting marketplace commerce,” explains Panaino. “There is optionality both in format and construct of the solution which means it is capable of mitigating several layers of risk and complexity, while safely extending existing relationships or opening up new opportunities in new territories. As such, digital escrow is a valuable solution and treasurers seeking to help their organisations grow would do well to explore further.”

The article was also published on Treasury Management International (TMI).