Escrow Account
An escrow account holds funds with a neutral third party until conditions both sides agreed to are met, at which point the money is released to whichever side the conditions point to. Neither party can move it unilaterally while it sits there.
Also called: escrow
An escrow account exists to remove the need for one side to trust the other. The buyer will not pay before delivery; the seller will not deliver before payment. Both can live with a third party holding the money against written release conditions, because neither has to rely on the other’s good faith, only on the holder’s obligation to follow the agreement.
Three things have to be true for that to work. The holder must be genuinely independent of both sides. The release conditions must be written down and objective enough that the holder can tell whether they have been met. And the holder must have no discretion to release funds on the instruction of one party alone.
Where it is used
Escrow is common in business sales, property transactions, licensing deals and marketplace payments where money and delivery do not happen at the same moment. In payments work it turns up most often when a portfolio or a licensed entity changes hands and part of the consideration is held back until regulatory approval of the change of control comes through.
In practice
Genuine escrow needs a neutral holder bound by written release conditions. An account the operator controls is not escrow because it is labeled escrow, and an account in the seller’s own name is not made independent by the word appearing in the account title.
Example
A buyer acquiring a licensed money services business pays the purchase price into an escrow account held by a law firm. The release terms say the funds go to the seller when the regulator approves the change of control, and back to the buyer if approval is refused within the agreed window. Neither side can instruct the law firm to do anything else.
Commonly confused with
| Term | How it differs |
|---|---|
| FBO Account | An FBO account is held and controlled by an operator for its own customers; an escrow account is held by an independent third party for two counterparties who do not trust each other. |
| Segregated Account | Segregation keeps customer money apart from firm money inside the same business; escrow puts the money with someone outside the deal entirely. |
See also
- FBO AccountAn FBO account is a bank account held in one company’s name for the benefit of its underlying customers. The company controls the account; the money inside belongs to the customers. The bank’s relationship is with the account holder, not with them.
- Segregated AccountA segregated account holds customer money apart from the firm’s own money, so the two are never mixed and the customer balance is identifiable as customer balance in both the firm’s and the bank’s records.
- Flow of FundsA flow of funds is a map of every party a payment passes through and, at each step, who legally controls the money. Banks, regulators and counterparties use it to work out licensing exposure, banking requirements and where settlement risk actually sits.
- Change of ControlA change of control is a transaction that shifts ownership or control of a licensed entity past a regulatory threshold. It must be cleared with the regulator before completion, by approval in some regimes and by the regulator not objecting within a set assessment window in others. What is assessed is the incoming owners, not the deal.