Breeding Trust in Transactions

Not that long ago, when participants in an online exchange reached an agreement, the only way to settle the transaction was to go offline. Escrow.com facilitates what the company likes to call "the last mile of e-commerce," that is, the settlement piece. Almost without exception, the e-marketplaces and exchanges had failed to address this critical part of the equation, says Russell Stern, Escrow.com's CEO. "After all, there is no shopping cart when you're talking about purchasing $150,000 worth of machinery."

Escrow.com's software brings together buyers and sellers who don't necessarily trust each other--whether in a B2B, B2C or C2C environment--and manages the dollar flow needed to close the deal in much the same way that the escrow process works in real estate transactions. "It turns out that what works well for real estate works perfectly for e-business," says Stern.

In fact, the company's roots spring directly from real estate, title and escrow company Fidelity National Financial. The concept of automating the escrow process within Fidelity was originally developed by Micro General, Fidelity's majority-owned information technology arm. The next logical step was adapting the interface to the Internet and offering that service to others, creating Escrow.com, the grandchild of Fidelity, which was spun off in October 1999.

Experience Counts
Having an experienced leader like Stern at the helm is a godsend for the Santa Ana-based startup. Given the size of the opportunity--Boston's AMR Research predicts that $5.7 trillion will move through all online exchanges by 2004--stern will need to draw upon every ounce of that experience as the competitive stampede to enter the space begins in earnest.

Some of the early start-up competitors have already gone by the wayside, unable to meet strict regulatory standards in certain states. Tradenable (formerly i-Escrow.com), though more focused on the consumer market, continues to give Escrow.com a run for its money. However, it is the slew of major players working on systems right now--from GE Global eXchange Services and Visa International to FinancialSettlementMatrix.com, a joint venture comprising Citibank, Enron Broadband Services, i2 Technologies, S1 and Wells Fargo--that will have the biggest impact.

As COO of disk-drive maker Western Digital, Stern had grappled for years with the same issues his e-business customers now face. Like many of his customers, Stern comes from an industry where a majority of the sales are transacted through middlemen. Charged with the task of developing distribution strategies that would enable Western Digital to retain more of the profit margin, he realized early on that e-business could open up huge opportunities.

By automating such functions as the provision of credit, collection of funds, invoicing and accounts receivable--traditional expertise of the distributor or middleman--stern saw that manufacturers would be able to handle those functions directly. More importantly, they would be able to capture more of the profit margin. That is exactly the opportunity and the expertise that Stern is offering customers with Escrow.com's technology.

Quality Over Quantity
Of course, the online world was different back when Escrow.com was launched. Online auctions were white-hot, and e-marketplaces had just begun to take off.

Before long the company had licensing agreements with 250 exchanges. Despite the adjustments required in the industry shakeout, Stern still sees a great opportunity but plans to be more discriminating in the future about who the company partners with--opting for quality over quantity.

Escrow.com's customer Converge (formerly eHITEX) is one of those quality partnerships. Converge is a PC marketplace made up of 15 companies--such as Compaq, Hewlett-Packard, Western Digital and Quantum--each of which gave $2 million in prepaid liquidity. Open for business since May 2000, Converge began by offering auction services but has ambitious plans to offer a range of Internet-based financial services, including Escrow.com's risk mitigation service. Now, when users such as the major computer OEMs, contract managers and suppliers select the cobranded escrow feature on the site, information identifying the buyer and seller is sent directly to Escrow.com where the transaction is then managed from end to end.

At its most basic, Escrow.com can provide its services through a simple link on a site, or customers can integrate Escrow.com's service into their own offering. Escrow.com's interface is compatible with every type of data model, including HTTP, XML, EDI, RosettaNet and PERL. Implementation times from initial planning meetings through execution usually run from a few days to a few weeks.

Though competition may be fierce in the months to come, Escrow.com says it will soon be announcing agreements with three of the nation's top financial institutions. In addition to Stern's strong leadership assets, the company is also well funded--an aggressive campaign has yielded $43 million in investment to date--and its revenue model is rock solid.

In assessing Escrow.com's ability to prosper, Nathaniel Palmer, vice president at Boston-based consulting firm The Delphi Group says, "The biggest challenge ahead will be getting the message out to people, letting them know what they offer." In order to better compete, Palmer also suggested the company expand horizontally.

Beyond Escrow
Soon, says Stern, Escrow.com will be branching out beyond escrow into global trade, offering services such as open account buying (with or without credit insurance) and cash-in-advance or will-call services. "The goal is to be able to settle any B2B transaction, no matter how complex," says Stern. Chase is particularly interested in the service Escrow.com is unveiling as an alternative to a traditional letter of credit, a part of the global trade process that is particularly onerous to banks. By bringing it online, Escrow.com believes it can whittle down this process from 21 days to two days.

After expanding its product offering to deliver a full complement of online transaction settlement services, Stern plans to expand the company's distribution internationally--to Europe, Southeast Asia, Japan and Latin America. As for the recent tough economic climate, Escrow.com hasn't been immune to its effects. The company laid off 30 workers, primarily in customer service, in January in an effort to reach profitability goals. But CEO Stern's outlook remains upbeat. "When you stay focused on execution--both against our plan and against our customer's goals--when you stay focused on what's important, that creates a lot of momentum as you build upon small but important wins."

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