Old law limits Net escrow services

Online escrow services are rushing to capitalize on the increase in person-to-person transactions, but in California, their activities have been limited by laws that were written before the Internet existed.

Last week, the California Department of Corporations granted start-up i-Escrow a conditional license to operate as an escrow agent, and state legislators are considering new legislation that would change escrow law to encompass Internet services. But the long-term outcome is far from certain.

Several companies, including i-Escrow and TradeSafe, have entered a market that could expand at nearly the same rate as the burgeoning e-commerce industry itself. I-escrow is promoted on eBay, whose more than 2 million members generate thousands of transactions every day.

Online escrow services work in much the same way as real estate escrow accounts, as a trusted third-party intermediary that ensures that the buyer receives the item for sale and the seller receives payment. Use of these services is optional for Internet transactions, but i-Escrow has caught the attention of regulators in its home state, which requires that escrow agents adhere to a strict set of rules, including keeping handwritten signatures for all transactions and paper records of each transaction, and having escrow officers at the company's offices.

Those regulations "don't make sense in this type of [Internet] business," said Edward Randolph, chief of staff for Assemblyman Lou Papan, who helped i-Escrow navigate the state bureaucracy.

"We want to make sure Internet escrow companies can do business in a reasonable and competitive manner and provide consumer protection," said Randolph. "The current law doesn't do either."

i-Escrow hopes the state's stamp of approval will distinguish it from other escrow services. "It gives consumers the added assurance of knowing we will protect funds in a legitimate way," said company spokesman Johnny Wong.

Rhode Island, where TradeSafe is located, doesn't require that escrow agents be licensed, but that doesn't mean it's any less trustworthy than i-Escrow, according to TradeSafe CEO Ken Pereira. "Licensing doesn't necessarily add to credibility; user experiences do," he said.

TradeSafe is taking steps to boost its credibility with customers, however. The company, which was founded in 1995 by an assistant attorney general of Rhode Island, plans to hire a major accounting firm to audit its books on an ongoing basis.