Brainstorming over an online business? Not sure whether you should opt for a Nodal, Escrow or Current account? Without further ado, let’s learn the ABCDs of each and find which one is the best fit for your business!
To go by definition, nodal accounts or nodal bank accounts are RBI mandated special internal bank accounts meant forbusinesses whichare intermediaries, a link between customers and sellers. Getting a step closer, what does intermediary refer to? Well, your business falls under this category if it enables you:
- To collect money online from customers
- To only source the products and not manufacture them
- To pay for the products partially or stock inventory
The striking feature of online commerce lies in the multi-layered interactions between several stranger parties – customers, payment gateway, vendors, etc. to name a few. If payouts between these parties aren’t down on time, it will lead to an erosion of trust.
To put it in simple words, the nodal account serves as a short term vault to store and distribute the money to involved parties. Payouts correspond to layers beyond sellers and customers such as- transportation fees to logistics partners, commissions to payment processors and charges to intermediaries etc.
Components of Nodal Account
- Intermediary – An entity that collects money from customers online and transfers it to the sellers and vendors.
- Settlement Cycle – RBIprojects it as a cycle for payments which are channeled through nodal accounts.
- Debits – Itcan be made to accounts of vendors, sellers, others as per agreed terms and conditions. Alsoit includes refunds for interrupted transactions.
- Credits – Credits are to be made into the nodal account based on pre-determined terms and conditions.
‘Escrow’ is a term that existed since pre internet age. ‘Escrow’ refers to a small piece of paper, scrap or parchment acting as a security deposit and was held by third parties until a purpose was served.
The underlying philosophy of an escrow account is to ensure security. It is also a temporary vault of money held by a trusted third party on behalf of contract. Itis used for:
- When the buyer and seller are strangers to each other
- When the contract is complex, high valued and long term
- Where payment is linked with the stage of completion
Actually, banks and financial service companies act as escrow agents and give escrow services as a fee. However, do consider going through the terms and conditions as declared by escrow agents before you sign up with an escrow agent.
A current account is the most familiar account used by a lion share of the businesses. Current accounts are basicallyliquid accounts havingzero upper limits on the number of permitted daily transactions (deposits, withdrawals, transfers etc.).
Due to possessinga liquid nature, most of the current accounts do not earn any interest. Current accounts support not just online but also offline/cash transactions – so be it deposit of a customer’s check at the bank or online transferof staff salary, a current account serves it all.
Current accounts are the go-to account for businesses to have, no matter what the size, nature or type of business it is. So, it is a necessity.
The Bottom Line
The question gets reduced to whether your business needs a nodal or escrow account besides a current account. The answer lies in the previous discussion itself. Check whether your business satisfies the purpose that each of nodal and escrow account serves and there you have the answer!