Thursday, July 23, 2020

Nodal & Escrow Bank Accounts for Intermediary Online Businesses

These days, online business models such as those of aggregators and e-commerce players require collection of funds on behalf of others and then passing them on to the accounts of actual suppliers after deduction of a commission, which is the revenue of the online e-commerce operator or aggregator.

To deal with such bank transactions, there are two types of bank accounts which can be used, viz. Nodal Account and Escrow Account. Here's explaining them both.

Nodal Account

It is a special bank account required to be opened by intermediary businesses holding money on behalf of vendors and customers. Such an account ensures that money does not legally belong to the intermediary, and is only held on behalf of others. 

It is essentially like a temporary vault to store and distribute the money to relevant parties, viz. vendors, logistics partners, payment gateways, etc. Intermediaries are not entitled to any type of amount from the nodal account except for the pre-determined commission.

Businesses that facilitate delivery of services immediately need not comply with these guidelines. For example, sellers of air and rail tickets.

The RBI has issued guidelines on operating such accounts by e-commerce players which can be accessed here. Certain guidelines on regulation of payment gateways and payment aggregators are also available here.

The RBI guidelines direct settlement of funds within T+3 days.

All nodal accounts are internal accounts of the bank. The RBI mandates a quarterly audit for every such account under the Payments & Settlements Systems Act 2007, which includes checking of records such as:
- Payee-wise detail of amount transferred out of the account
- Payee-wise classification of closing account balance
- Losses due to fraud, chargebacks, pending disputes and refunds.

You can open a nodal bank account with any large authorized bank if you meet the bank's criteria of transaction volume for opening such an account.

These are opened by traditional banks such as ICICI and Kotak, as well as by new age online banks and gateways such as Paytm and Razorpay.

Escrow Account

While there is a fixed settlement cycle for Nodal Accounts, Escrow accounts may be maintained for a longer duration and for specific high value transactions where the two transacting parties do not know each other and they wish to open an account with a banker, who is a trusted intermediary.

The release of funds from an escrow account are on fulfillment of pre-defined and agreed on terms between the parties.

These accounts have been in existence for many years and are traditionally used between transacting parties in high value deals such as those of real estate transfer or business transfer.