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In today’s interconnected global economy, cross-border payments play a pivotal role in facilitating international trade and enabling seamless transactions between individuals and businesses worldwide. 

According to Juniper Research, the global spend on B2B cross-border payments is set to exceed $40 trillion by the end of 2024.

However, the complex nature of these transactions often presents challenges of trust and security risks. Whether it’s a large-scale business, a micro, small and medium enterprise (MSME), or a complex commercial agreement, the parties involved need reassurance that their funds and assets are protected until all conditions are met. This is where escrow services come into play. 

Escrow is a financial arrangement wherein a neutral third party, typically a bank or an escrow agent, holds funds or assets on behalf of two or more parties involved in a transaction. The funds or assets are held in a secure account until all the predetermined conditions of the transaction are met. Once the conditions are fulfilled, the escrow agent releases the funds or assets to the appropriate parties.

Need for a secure payment gateway

International trade plays a vital role in the success of MSMEs and startups, but these businesses often struggle with timely payments and smooth cross-border transactions.

According to the Global Alliance for Mass Entrepreneurship, delayed payments to Indian MSMEs amount to a staggering Rs 10.7 lakh crore, with 66% of invoices experiencing delays and 3% never being paid. This underscores the pressing need for innovative solutions to address the payment challenges faced by these entities. 

To alleviate these issues, India’s unified payments interface (UPI) can be leveraged for cross-border transactions. While UPI has enabled transactions with countries such as Singapore, Australia and Canada, there is a lack of transparency and protection in cross-border trade. Rectifying this is crucial to instil confidence in businesses and foster secure international transactions without the fear of default or fraud. 

In India’s thriving startup ecosystem, with 92,683 registered startups recognised by the Department for Promotion of Industry and Internal Trade, payment assurance and contract enforcement pose significant challenges.

The country’s low contract enforceability index and lengthy litigation processes hinder timely payments, necessitating effective solutions to support the growth and success of these emerging enterprises. Additionally, compliance with regulations and fraud prevention in cross-border transactions demand comprehensive tools and platforms to mitigate risks, ensure trade compliance, and safeguard against fraudulent activities.

Safe and seamless financial transactions

In the realm of international trade, the ability to receive payments in various currencies is essential. Escrow services act as trusted intermediaries, providing a secure framework for various types of transactions. They play a crucial role in mitigating risks, instilling confidence, and ensuring fairness in financial dealings. 

One of the primary advantages of using escrow services is the heightened security and protection they provide. By entrusting the funds or assets to a neutral third party, all parties involved can have peace of mind knowing that their interests are safeguarded. The escrow agent ensures that the terms and conditions of the transaction are met before releasing the funds, minimising the risk of fraud, default, or misappropriation.

Escrow services are particularly valuable in complex transactions that involve multiple parties and intricate conditions. These could include cross-border mergers, acquisitions, or joint ventures where significant sums of money or valuable assets are at stake. The escrow agent acts as a central hub, coordinating the transfer of funds or assets, verifying compliance with contractual obligations, and ensuring a smooth and fair process for all parties involved.

Moreover, trust is the foundation of any successful business relationship, and escrow services contribute to building that trust. By providing an impartial and transparent framework, escrow helps foster confidence among the parties, especially in cases where there may be cultural, legal, or language barriers. The presence of a trusted third party facilitates open communication, dispute resolution, and a sense of fairness, enhancing the overall credibility of the transaction.

Cross-border payments play a vital role in today’s globalised economy, facilitating international trade and enabling seamless financial transactions. However, ensuring transparency, safety, and security in cross-border payments has been a long-standing challenge.

The coming of escrow services serves as a prudent step towards mitigating risks and achieving smoother, more secure financial transactions in an increasingly interconnected world. With the use of escrow, exporting startups and MSMEs can confidently navigate the global marketplace, driving growth and success in their international trade endeavours.

(The author is Founder and Managing Director of Escrowpay, a digital escrow platform.)