Web escrow service can provide safety net

Web posted April 4, 1999

By Vivian Marino
Associated Press

NEW YORK -- Several months ago, Bart Moccabee shelled out $560 for some computer hardware sold on an Internet auction, then eagerly awaited the merchandise.

He waited, and waited some more -- hoping to use the microprocessor and memory boards he successfully bid on to build a personal computer -- but he never heard from the seller again. When he tried to e-mail that individual to track down his purchase, he found the address inactive.

He got stung.

Yet Mr. Moccabee, a 27-year-old technical support supervisor from Hilliard, Ohio, wasn't out a cent. Because the order was so big, he decided beforehand to place his payment with an online escrow service. The service, i-Escrow, which processes transactions on the eBay auction site, cheerfully refunded his money, along with a 5 percent service fee he paid.

``Many other people got ripped off by this guy,'' said Mr. Moccabee, a frequent Internet shopper. ``If I buy anything else big, I'm going to use this (escrow service) again.''

Online sales between strangers require a considerable amount of trust, and lots of things can go wrong. As more people use the Internet to buy and sell everything from Beanie Babies to beach bungalows -- millions of online transactions take place each month -- an increasing number are turning to escrow services to facilitate the exchange.

For a fee, which varies according to purchase price, an escrow holder essentially acts as a middleman to ensure buyers put up their money and sellers deliver the goods as promised. Typically, money is placed in a bank escrow account until the buyers receive and inspect their purchases and approve the release of funds to the seller. The buyer and seller can negotiate who pays the escrow fee.

Otherwise, in a worst-case scenario, you could end up with a game of chicken: The buyer wants to see the item before paying; the seller won't part with it until he's paid. So, now what?

``We're selling trust,'' said Ken Pereira, chief executive officer of 4-year-old TradeSafe Online Corp., in Providence, R.I. (www.tradesafe.com), one of the first Internet escrow services to be founded.

``People come to us after essentially enacting transactions. They don't want to put a $5,000 check in the mail for someone they don't know.''

The other major escrow services include i-Escrow of San Mateo, Calif. (www.iescrow.com) and Trade-direct of Tampa, Fla. (www.trade-direct.com). Many have struck deals with online auction and classified ad companies like eBay, OnSale, city Auction and Recycler.com.

Also, Auction Universe of New York (www.auctionuniverse.com) recently started its own in-house escrow service known as BidSafe.

All report a steady climb in business, especially in recent months as word continues to get out that such services are available.

``It hasn't caught on in a big enough way yet, but the growth month to month has been tremendous -- between 20 and 30 percent (in sales),'' said Mr. Pereira, echoing the growth rates of other escrow companies.

The vast majority of Internet transactions do go off without a hitch, says eBay spokesman Kevin Pursglove. EBay, the largest of the Internet auction sites, has various safety measures already in place, like an online ``feedback'' system that shows performance records of buyers and sellers and a newly instituted insurance program that provides limited coverage for purchased items.

Mr. Pursglove says using an escrow service is an additional safety step that should be considered when buying expensive items.

``If you're getting into an area where the bid is $700, $800, $900, you'd be wise to take this extra step,'' he said.

Purchases involving escrows have ranged from as low as $10 to as high as $50,000, the companies report.

Besides providing peace of mind for both buyer and seller, escrow services help speed up the transaction because they allow credit cards to be used.

Those using BidSafe, for example, can expect to receive their merchandise within five days if they charge their purchases, vs. 10 to 15 days if they mail a personal check, says Bonnie Schwartz, a vice president at Auction Universe, and creator of the BidSafe program.

Sandy Smith, 42, of Pulaski, Tenn., says that has made her online business run so much smoother.

``I don't have to go hunting around and matching up payments,'' said Ms. Smith, who sells Beanie Babies, Furbies, sports cards and other collectibles on Internet auctions like Auction Universe.

The escrow services also track the shipping services that deliver the goods. Buyers, for instance, can go online and quickly find out the location of their merchandise at various stages.

I-Escrow President Sherman Kwok says most transactions proceed like clockwork, although in a small number of instances, both parties have had to renegotiate a price because an item wasn't quite what the buyer wanted.

So, what has been the most unusual purchase involving escrows? An Egyptian cat mummy.

``We're keeping an eye on that one,'' said Mr. Kwok.

How Web escrows work

A sampling of how Internet escrow services work:

A buyer and seller enter into an online business transaction.

The buyer sends a payment to the escrow service -- via credit card, personal check, money order or cash.

Money is placed in a bank escrow account and held there until it's available -- i.e.: five days for a personal check to clear, two days for a money order. Credit card purchases can be expedited immediately.

The service tells the seller to ship the purchased item within 48 hours to the buyer.

The buyer usually has 24 to 48 hours from the time the item is received to look it over and accept or reject it.

If the item is accepted, the service releases the payment to the buyer.

If the transaction is canceled, the buyer must return the merchandise to the seller. The money is returned only after the item is received by the seller.

Some Internet escrow companies and what they charge:

-- TradeSafe, Providence, R.I. (www.tradesafe.com). Charges from a flat fee of $15 for non-credit card purchases up to $400 to 2 percent for non-credit card purchases over $5,000. Credit card users are charged 4.25 percent of the purchase price, plus an $8 to $12 fee, depending on the amount of the purchase.

-- I-Escrow, San Mateo, Calif. (www.iescrow.com). Charges a flat fee of $5 for purchases under $100. For purchases above that amount, charges 5 percent of the purchase price up to $5,000, 8 percent up to $10,000 and an additional 1 percent for each amount over $10,000. Will not handle sales of more than $25,000.

-- Trade-direct, Tampa, Fla. (www.trade-direct.com). Fee is 5 percent of the purchase price up to $1,500 and 4 percent thereafter.

-- BidSafe, provided by Auction Universe, New York (www.auctionuniverse.com). Offers two plans: BidSafe Buyer, which is free to buyers who register, and BidSafe Gold, which costs registered sellers $19.95 a year.