Castler Escrow

Escrow Accounts versus Current Accounts and Nodal Accounts

Normally people harbour little knowledge of banking terms related to different types of accounts. Unless one has a business or a venture of one’s own, one would know what a savings account is – at most. And while people generally hear about current and nodal accounts, their characteristics are often not known with sufficient depth.

Why Do People Choose Current Accounts?

Businesses normally use current accounts due to the high level of flexibility they offer. This account is different from a savings account as it does not charge  interests on deposits. In lieu of this, the account holder receives a high level of liquidity. Therefore, one can withdraw money from a current account anytime. Depending on the amount of your transactions, an NEFT (National Electronic Funds Transfer) or an RTGS (Real-Time Gross Settlement) can be carried out. Funds are transferred directly to and from the current account with these methods.

Although this process offers ease, it is not necessarily safe to transact through current accounts. Problems like discrepancies in the decided value of a transaction between two or more parties can always occur. Ultimately, one may have to resort to legal action for resolving these issues. 

But perhaps the most important reason why current accounts are not safe enough is that these are not agreement-based accounts. You can fluently hold transactions with different parties without a prior agreement with them. There are no specific clauses, or terms and conditions, that govern transactions to and from a current account. This can also be liberating for some businesses in certain ways. It is of course easy to have one wallet holding $10k, with which you can carry out 10 different transactions, rather than holding 10 different wallets, each holding $1k, for transactions with 10 different parties. But then again, you can also get duped due to withdrawals that agreements don’t govern.

When Are Nodal Accounts Used?

A nodal account is typically used by e-commerce platforms for increased trust factor between transacting parties. When it comes to nodal accounts, a special account is created to transfer funds for a particular purpose only. This ensures that no single party holds the escrow amount at a particular point during the transaction.
Compared to a current account, nodal accounts do offer a higher level of safety. But these accounts are limiting in the following ways –
  • You cannot withdraw cash from a nodal account.
  • The medium of transacting is money.
  • Because of the second point, one cannot process transactions of shares, debentures, and other investment tools.
  • In India, it is mandatory for companies such as online marketplaces to open nodal accounts for buyers and sellers using their portals. So if someone wishes to buy a book on Amazon and pay through a debit card, the money is held in a nodal account for a set time period. Within this period, one can raise queries to Amazon in case of any problems with the purchase. If the problem turns out to be genuine, Amazon releases the payment back to the buyer (refund) , and the seller retrieves the faulty product. However, if Amazon fails to determine whether the query/concern is genuine, the buyer would have to stick with the product.

    When Should You Use Escrow?

    Escrow too is a type of account offered by banks and independent escrow service providers. These accounts are versatile and flexible – they are fit for a variety of use-cases. However, due to the lack of accessibility to traditional escrow, people are mostly unaware of this transaction solution.

    These agreement-based accounts are opened for particular purposes with specific parties. Deposits in an escrow cannot be used for any purpose besides that particular purpose. A neutral third party owns and manages the escrow vault. This party makes sure that funds are released only when all the transacting parties are satisfied with the outcome of the transaction. 

    Traditionally, escrows too are limiting. It is difficult to keep track of multiple escrow accounts opened with different parties, along with keeping track of different balance amounts in different accounts. Digital escrow account services, however, are a panacea. 

    Digital escrows operate on a master account + virtual account model. Users can create multiple virtual accounts on the portals of digital escrow companies. An unlimited number of virtual escrow accounts can be opened through their portal, or through API integrations. Besides this, one can carry out innumerable transactions quickly and securely. 

    With digital escrow, one can hold transactions using any medium and for any good/service. You can buy shares, gold bullions, used cars, land, a house, carry out exports, buy source codes, sell services – the list goes on. Due to digitization, escrows have overridden the problems they usually harbor. Each account has its limitations – for escrows it was their specificity. However, this has changed considerably today.

    Comment your thoughts down below and share with us what you think! You can also mention any particular fintech topics you would like us to cover in our upcoming blogs.

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