Why do escrow services use wire transfer?

Question

Escrow services seem to typically require earnest money funds to be deposited via wire transfer. These days the wire transfer instructions will be surrounded by 50-point bold red text warning you that wire fraud is on the rise and you must be extra careful to follow the original wire transfer instructions exactly, call the escrow service to verify the account details, and ignore any phone calls, emails, or text messages you receive with "new" wire transfer instructions.
On the other hand, if the sale doesn't work out, the escrow service will refund your deposit with a check.
I understand why wire transfers are prone to fraud. What I'm less clear on is why they're still the standard for escrow deposits.
I have some guesses about why escrow services might reject other payment methods, but I'm not sure if they're sound:

Checks can bounce (or in some cases be reversed)
ACH transfer limits from most banks aren't enough to accommodate the deposit sizes in hot modern markets
Nobody wants to put a big deposit on their credit card, even if they have a big enough credit limit (plus it might tank your credit rating and affect the mortgage approval process)

Does that about cover it, or are there nuances or other explanations I haven't thought of?

Phil Frost · Accepted Answer

Escrow services exist to reduce counterparty risk. By requiring each party to post their assets in a trade first, the escrow service can guarantee that the trade will either execute fully, or not at all.
To make this guarantee, the escrow service needs to be sure you really have the assets you are bringing to a trade. This is why a personal check is no good: you may not actually have the funds, and the escrow service may not find out for weeks. It's also why they will require title insurance if an exchange of real estate is involved: they need a guarantee that the seller is actually allowed to sell the property.
Wire transfers, unlike personal checks, for the most part can't be reversed. Your bank won't allow you to send money you don't have, and as long as the bank followed your instructions correctly, they won't reverse the transaction just because you changed your mind. So when you receive a wire you were expecting, you can be sure that money is yours.
This makes wire transfers good for escrow services, but it also makes it good for scams. If you tell a bank to wire money to a scammer and they follow your instructions, they won't reverse the transaction just because you changed your mind.
This is why escrow services and scams use wire transfers: they have a common need for a way to send money that can't be reversed.

Pete B. · Answer

While wire transfers are prone to fraud, so are others methods of transferring money.  Wire transfers are expensive, there by limiting their use to the transfer of large amounts of money (typically).
The bottom line is that there is no more reliable way to transfer money quickly than wire.  Many occur each day with no issues.  Like anything else, those with less experience in wire transfers are more likely to be defrauded.  Also they can be easy targets as they may announce on social media that they are buying a home.  Real estate transactions are the most common reason the typical consumer wires money.
IMHO, it is an industry ripe for disruption but until banking gets on board with an alternative means, for now we have wire transfers.
Escrow services only use wire transfers for large amounts of money.  When one uses escrow to pay their property taxes and home insurance, that is typically done by ACH and checks.

Aganju · Answer

Wire Transfers are the convenient way to make a large, non-reversible, fast, no-problems payment - once they get money through a wire transfer, they can be sure it is real and irreversible.
They don't care about the associated (ridiculous) fees, as the customer has to pay them.
P.S. I'd love to be able to put a down payment on a Credit Card! - I would get a gazillion miles, and pay no wire fees. The reason they don't accept it is that credit card providers charge a transaction fee between 2-5% to the business - and they certainly don't want to lose 2000 - 5000 of your $ 100000 downpayment.

Why do escrow services use wire transfer?

3 Answers

Add your own answers!

Ask a Question