Sunday, September 21, 2014

Is an Escrow System Cheaper than Charge Backs

Trust is tough when payer and payee never meet physically. When any part of a transaction fails costs mount and recriminations fly. If the concept of a small value gross real time payment system succeeds it will need a mechanism other than Reg E or charge backs to cure a failed transaction.

So the bum’s pocket (small value gross real time payment system designed earlier in this blog) requires a method to protect both sides of a transaction. I envisage different solutions when the world eliminates charge backs. There might be healthy competition between shippers and financial institutions (FI). 

Shippers may offer a service similar to collection on delivery except collection occurs before shipment. In this scenario the payer pays shipper; shipper picks up and delivers goods; payer accepts shipment; shipper pays payee (keeping shipping fees).If the payer or payee disputes the transaction then the shipper picks up the goods and returns them to the payee and refunds the payer(subtracting more fees).

Another alternate solution dictates the design of the data protocol for a command to pay message. The message must allow for multiple payees. In that way a FI can offer standard escrow services. The payer directs the bum’s pocket to credit a shipper and an escrow account owned by the FI.  The FI moves the funds to the payee after notification of receipt by the payer or the passage of time. In the case of a dispute the FI holds the funds until payer and payee resolve it and both parties notify the FI they resolved the dispute. 

The question arises what costs more, routine multiple transactions, or charge backs. It seems to me that the former is more cost effective, but without any data or actual firms providing these services it is at best a haphazard guess. Certainly the passage of time allows for interest charges which allows the intermediary payee a chance for income without charging either the payer or payee.

However the payment system evolves, payees likely will be happier, and payers will not see much difference unless they intend to defraud their payees.

Next Blog: A discussion on current methods for foreign exchange transactions

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