You may have come across it on Trade Me … Mike Pero is trying his hand at it … the Ministry of Consumer Affairs recommends using it. But what is escrow and how does it work?
Escrow services are common overseas but are not widely known here. They act as a safeguard if you're paying someone for goods or services that you’ve not yet received. It's a contractual arrangement where the payment or the deposit is held by an independent third party and only released to the supplier once the deal has been completed.
Why use it?
You can use escrow services for practically any transaction from home renovations to online purchases. If a buyer or seller is reluctant to use an escrow service and you have concerns about the transaction, that can often be a warning signal to be careful.
Who and how much?
For years Kiwis have been arranging escrow services through their lawyers for house deposits and similar transactions. Now other options are beginning to emerge: Trade Me offers SafeTrader and Mike Pero has opened an escrow company called SafeKiwi. Fees vary and can be paid by either party or shared – both SafeKiwi and SafeTrader start their fees at $4.95 per transaction.
Watch out for scams
However, escrow scams are also becoming increasingly common. A favourite overseas is where your auction bid is successful and the seller suggests an unknown (fake) escrow company. You send the company your money … and never receive the promised item. By then the escrow company, the seller and your money have vanished.
Another scam is a (fake) escrow site that closely resembles a legitimate service. The buyer signs up with the phony site and sends a payment – but doesn’t receive the goods in return.
Our advice
- If you’re asked to pay money in advance (or if you’re supplying a service or delivering goods before receiving payment), consider using an escrow service.
- Make sure it’s kosher by checking the site thoroughly and asking which other businesses use it – never use an escrow service you or people you trust haven’t previously heard of.
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I support the idea of a published list of recognised services. In 2006 when I had a dispute about an item that arrived "not as described", I was surprised to find that PayPal had already paid the vendor, even when I lodged a dispute within the required 7 days. As part of their reply to me, the PayPal spokeperson also claimed it was "not an escrow service". I replied as follows (quoting a Consumer article on the subject), but received no useful explanation: "I am puzzled that you write that PayPal does not offer an escrow service. Years ago, when I joined PayPal, I had never heard of escrow services. In learning about PayPal I discovered what the term meant. By coincidence, the New Zealand Consumers Institute in its magazine (May 2006), pp 3-4 (titled "Scams 101" under the heading "Fake escrow services" describes PayPal as follows "Escrow services are a good way to protect yorself on expensive internet transactions. But only use recognised services like Safe Trader and Pay Pal". www.consumer.org.nz
Do you mean PayPal has ceased an earlier service?(As a member I was not told); Or that I was misinformed? (I believe I read it on either E-Bay or PayPal websites). Your policy says that when matters are under dispute you withhold payment, or even reverse a payment, which sounds like an escrow service to me". Fortunately the matter was resolved via VISA's unambiguous service.
We need a list of trusted Escrow companies before the scammers get a foot hold.Preferably companies who will provide a general service rather than just for their own customers.
As this is rather new, most people in NZ wouldn't know which are 'trusted' escrow companies. I suggest that Consumer NZ (or MCA) set up a database of trusted escrow companies which members could refer to with confidence. Or they they could be registered, like banks.