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What Is an Escrow System?

Some escrow companies require account holders to be fingerprinted.
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  • Written By: Jason C. Chavis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 August 2014
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An escrow system is any organized method of establishing an account which holds funds prior to a transaction. This process usually involves some sort of third party that acts as an escrow agent; an individual or firm that works on behalf of the principle owner of the fund. The escrow system is most often associated with buying a home, however, it can be used in any transaction prior to the actual movement of money. It is often also used in trust funds, which eventually will be responsible for payment to some sort of future dealings. The concept has existed since at least the Middle Ages, when funds would be held by third parties for the promise of secure payments in the future.

The escrow system is a large industry throughout the world. One common example is a third party bank or automated teller machine. When a person deposits the funds into his or her account via these institutions, it is held in an escrow account until the transaction is completed. The check or money is put into the account by the individual and held until it is fully transferred to the desired party.

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Another modern example of the escrow system can be found in Internet transactions. When purchasing products via online auction sites or individuals and businesses being paid for services rendered, the money is sent from one party to a third party firm. This firm hold the money and then releases it to the desired party. The third party facilitates the transfer and makes a profit from a small usage fee or percentage.

Many security codes and processes are used in the escrow system to maintain safety for the funds. When dealing with electronic transactions, the escrow account is protected by a secret coding that can only be accessed by one of the two parties. In the live transaction world, this comes in the form of proper identification, signatures and other normal security. Some escrow companies even require biometrics such as iris scans and fingerprints.

The purpose behind the escrow system, outside of security, is to make money. Third party firms facilitate the transactions for the purpose of making some of the money as profit. Usually, this money is either paid by the sender or the receiver in the transaction.

Escrow fraud is also a major concern for the financial industry. It is relatively common for fake financial institutions or individuals to set up an escrow scam in an effort to take the money from a business or person. The money is placed into escrow and the scam is finished by the money simply vanishing from the fake escrow account.

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