One of the common questions we often get here at WePay is about offering escrow or delayed payments— understandable, since many of our platform partners are services uniting a buyer and a seller who don’t know each other, and escrow offers a way for both sides to be comfortable with a transaction even with that unknown.
Yet like a lot of things in the payment industry, escrow is something that seems like it should be simple but is actually surprisingly complex when you really look at it. Given that, we thought a little primer might be useful.
What is Escrow?
Here’s the first bit of hidden complexity, because when people ask about “escrow,” that’s not always what they mean. Oftentimes, what they’re really talking about is the ability to delay payments.
There are any number of situations where a platform might need to do this. An obvious one is where a payer is buying something from a seller that can’t be readily evaluated for quality. Take a marketplace for concert tickets, for example. In this instance, the product could ship immediately, but until the buyer actually brings the ticket to the venue and is actually let into the concert, it would be very hard to say whether they got what they paid for.
The ticket platform therefore might charge the buyer but only release the funds to the seller after the show, and only if they don’t get an angry message from the buyer saying the tickets were bogus. That cuts down on fraud, because unscrupulous types know they won’t get any money from just printing out and selling fake tickets. It also might increase conversion rates for the platform, because buyers might be more comfortable using the service if they’re getting some guarantee that the things they buy will be genuine.
This might look like an escrow. Or, it might look like a money-back refund policy that the platform helps to enforce.
And that’s an important distinction, because escrow agents are actually something that is regulated at the state level, meaning anyone who wants to offer escrow services needs a license from the states they’re accepting funds in. There’s good reason for this regulation. Since the escrow agent is holding other people’s money, there’s a lot of potential for wrongdoing. Licensing requirements help prevent the escrow agent from just disappearing into the night with the buyer’s money, or from saying they are holding something in escrow when they’re really using it to play the stock market, or any other potential abuses you can think of.
Here’s how California law sees escrow with regard to Internet companies:
“With regard to Internet escrow companies, ‘escrow’ also includes any transaction in which one person, for the purpose of effecting the sale or transfer of personal property or services to another person, delivers money, or its Internet-authorized equivalent, to a third person to be held by that third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by that third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter.” — California Financial Code 17003(b).
So wait, does that mean that ANY platform that delays payments has to be licensed by the state?
The short answer? Probably not, but maybe.
You’ve probably noticed that definition looks very close to what our hypothetical ticket platform was doing in the earlier example — it was a 3rd party that was holding on to funds until a transaction could be verified to have occurred satisfactorily. But there are a couple of differences that might be relevant, legally speaking. For one thing, the escrow it’s providing here is not its primary service — rather, it’s the technology that lets ticket sellers find ticket buyers and vice versa. It’s also not the buyer or the seller that’s choosing to put the funds into escrow, but rather the platform itself that’s choosing to hold onto funds as a part of its normal efforts to fight fraud and keep everyone using its service honest.
That might make the ticket platform materially different enough that it can essentially hold funds in escrow without actually being an escrow agent. Or it might not. Like a lot of legal issues, once you get outside what’s clearly spelled out in the law it becomes more a matter of probability and risk assessment than hard and fast rules.
What is clear is that, if the platform is holding the money, regulatory compliance is a burden that would fall on the platform. If the ticket platform were found to infringe, the regulators would be sending angry letters to them, not the company processing their payments. That could be true even if the platform holds the money in a bank account “For the Benefit Of” (FBO) its customers, or if the platform uses a third party payment processor to hold customers’ money for the platform. If the customers’ money appears on the platform’s balance sheet, the platform is exposed to regulations that apply to that money, such as the California internet escrow law.
How WePay handles delayed payments
At WePay, we hate legal ambiguity. Our promise to our partners is that they will never have to concern themselves with the regulatory risk and compliance, because we will cover that all for them. They expect us to keep everything on the up and up, so that any potential downside is minimized. Consequentially, we’re very cautious about anything that introduces additional risks.
That being said, we offer our partners a way that they can do delayed payments and ensure that they don’t have to worry about hard legal questions about escrow.
It starts with the way we process our payments: our platform partners never hold customers’ funds. WePay assures that those funds go straight from the buyer to a special bank account, then to the seller, without ever being held by the platform or appearing on the platform’s balance sheet. That means that WePay, and not the platform, is on the hook if the states ever do decide that marketplaces (or other types of platforms) need to be licensed escrow agents to provide delayed payments.
We also offer two options that act like escrow, but which we think are compliant:
- Delayed Payouts: This works in a straightforward manner: collect a payment from the payer, but then hold onto the funds for a short time before sending them on to the payee. Because this looks the most like escrow, we currently set a limit of 14 days as the maximum time the payment can be held. We’ve generally found it to be the case that the longer you hold onto a payment before sending it to its eventual destination, the more nervous the regulators get. So we felt that this limit struck a good balance between a level of risk we were comfortable with and a level of flexibility needed by our partners.
- Tipping Point Payments: For this method, the platform collects the credit info from the payer at the time that the transaction is initiated. However, we don’t actually charge the card until a later date when a given condition is met. It’s flexible enough to be used as a practical alternative to a delayed payment, but doesn’t present as much risk, because the platform is never actually holding on to funds for any length of time.
If you’d like to learn more about delayed payments, contact our API team at API@wepay.com