Escrow payment solutions require the supplier to meet certain conditions (e.g., ship products) before the funds are released. In theory, Escrow payments ensure that the buyer is not scammed and that products are actually shipped.
In practice, however, Escrow payments are only as good as the ‘money release conditions’ the supplier is forced to comply with. Keep reading, and learn how Escrow payments in China work, and the various solutions available for importers.
What is Escrow?
Normally, a buyer transfers funds directly to the supplier’s bank account. This is risky, as the supplier could then disappear or deliver an insufficient product. There’s no ‘refund’ or ‘chargeback’ mechanism in place when paying suppliers by telegraphic transfers.
Escrow, on the other hand, involves a middleman receiving the funds from the buyer – only to release the money once certain conditions have been fulfilled.
These conditions can either be set by the buyer and seller, or by the Escrow payment services. Common ‘escrow payment conditions’ include the following:
The seller can prove that the documents are shipped (e.g., provide a tracking ID)
The products are approved by the buyer after delivery
Is it safe to pay suppliers using Escrow services
At first, an Escrow payment may seem like a safe bet when importing products. That said, whether it’s safe or not depends on the escrow conditions.
Let’s say that all the supplier must do is to provide a tracking ID. All you get is a number of a package that may contain incorrect or defective items.
To ensure that escrow actually works, you need to set conditions that the product design, quality, compliance, and quantity are verified. Ideally, the Escrow payment should only be completed once the following conditions are fulfilled:
Approved quality inspection report submitted
Approved lab test report submitted
Airway bill submitted
The problem is that most Escrow payment services only use standardized terms that are far from as strict as those listed above.
I also recommend that the conditions explicitly which companies should issue the quality control and lab test report. Otherwise, the supplier may fabricate these documents, or appoint a company that they can control.
Escrow payment services in China
There is no unified ‘Escrow payment system’ for sending money to Chinese suppliers. However, there are several Escrow payment solutions available on the market:
Alibaba Trade Assurance
Rather than paying directly to the supplier, the buyer transfers money (via wire transfer or credit card) to a bank account held by Alibaba.com. Once certain conditions have been fulfilled, the money is then transferred to the supplier’s bank account.
Unlike most other Escrow payment solutions, the Alibaba Trade Assurance offers buyers to set their own ‘release conditions’. For example, you get to detail technical specifications and set terms of quality inspections – before the supplier can access the funds.
As I already explained in this post, what matters is what is shipped, rather than that ‘something’ is being shipped.
DHgate.com has used an Escrow style payment process since they first launched their platform. The payment is only released to the supplier once the buyer approves the items.
Can I get my money back when using an Escrow payment solution?
No, Escrow payment solutions don’t offer any chargeback mechanism. Once the conditions are fulfilled and the money is transferred to the supplier, there’s no way to claim back the funds. As such, you must be very careful when setting the Escrow payment conditions.
Do most suppliers accept Escrow payments?
Escrow payment solutions are generally not provided by third parties, but supplier directories. Whether a supplier accepts Escrow payments or not depends entirely on the payment solutions offered by their supplier directory of choice.
For example, suppliers listed on Alibaba.com can apply to become part of the Alibaba Trade Assurance program – while online wholesalers listed on DHgate.com are subject to their payment terms and conditions.
If you find a supplier that’s not eligible or part of any such ‘Escrow payment system’, your best options are to either wire the funds via telegraphic transfer (T/T) or a Letter of Credit (L/C).
Learn more about payment methods
Do you want to learn more about payment options when importing products from China? This is a list of articles covering various payment solutions for importers:
Co-founder of Asiaimportal (HK) Limited and based in Hong Kong. He has been quoted in and contributed to Bloomberg, SCMP, Alibaba Insights, Globalsources.com, China Chief Executive, Quartz Magazine and more.
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