Auction Sites’ Popularity Spawns Escrow Services

Bruce Todesco was scanning the classified ads on America Online during a lunch break three years ago when he happened upon the used tape recorder that launched his Internet escrow company.

Todesco, an attorney and amateur musician in Providence, R.I., liked the high-end recorder enough to e-mail the seller about buying it. They struck a deal, but when the time came to pay, Todesco balked. Years of courtroom experience trying civil fraud cases made him leery of paying a good sum of money for something sight-unseen. Trouble was, the seller wouldn’t part with the recorder until he had Todesco’s check safely deposited in the bank.

The impasse scotched the deal. But it gave Todesco an idea: What Internet shoppers needed was an escrow holder, a sort of middleman who would ensure that buyers put up their money and sellers delivered the goods when such transactions are arranged through electronic classified ads and online auctions.

Todesco’s company, TradeSafe (https://www.tradesafe.com), is one of several small firms in the business. Typically they place buyers’ money in a bank escrow account until the buyers receive and inspect their purchases and approve the release of the funds to the seller.

In recent months, TradeSafe, i-Escrow (https://www.iescrow.com) and Trade-direct (https://www.trade-direct.com) have struck deals with such online auction and classified ad companies as Onsale, eBay, CityAuction and Recycler.com. It’s a natural fit, according to executives at the companies.

“Think of auctions as driving your car. Escrow services are like having a seat belt on,” said John Thibault, a vice president at online auctioneer eBay.

Despite the rapid growth of online auctions and electronic classified ads, online shoppers who use escrow services are still the exception rather than the rule. Since opening for business in 1995, TradeSafe has handled 1,000 transactions worth a total of $250,000. Trade-direct and i-Escrow have reportedly handled several thousand transactions each.

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The companies believe their service will become more popular as people turn to the Web to sell expensive merchandise such as computers, musical instruments, cameras and collectibles.

“We’ve had a couple of large orders, in the thousands of dollars, for collector cards,” Todesco said.

Whether online escrow firms are held to the same state licensing guidelines as are real estate escrow firms is unclear. California authorities say firms based in the state--such as San Mateo-based i-Escrow--should be licensed. But the extent to which those based elsewhere come under their own states’ laws may vary.

Online escrow operators attempt to instill confidence in their businesses by displaying magazine ratings and seals of approval from consumer organizations such as the Better Business Bureau.

The companies charge a flat fee of 2% to 7% of the purchase price. TradeSafe’s fees range from $15 for transactions involving $300 or less to $50 for those of $2,500 or more. Some, but not all, refund the fee if a deal falls through. (TradeSafe keeps the fee.)

Industry leaders say demand for their services is growing.

“When we first started there were the three of us,” said Sherman Kwok, president of i-Escrow. “In the last six months, I’ve noticed about four other tiny companies have popped up in the field. That tells me people are starting to take notice.”

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Frequent Cutting Edge contributor Michelle V. Rafter covers the Internet for Reuters and others. She can be reached at mvrafter@deltanet.com