Head of Liquidity Product
Originally published in Globe Street in January 2019.
For many organizations—especially property management firms or those who frequently use 1031 exchanges—managing escrow accounts is an essential part of their business, although one that is labor-intensive and time-consuming. Historically, every stage in the escrow process—from opening an account to producing end of year tax forms for the IRS—required them to interact with their bank. To complicate matters, escrow is subject to a confusing combination of professional standards, state and federal regulations, and IRS reporting requirements, which mean managing escrow accounts requires painstaking attention to detail. Finally, account holders had no real-time visibility into account balances or activity, depending as they did on monthly statements. And when they received their statements, the only way they could determine their overall escrow position was to total the individual accounts.
When a business maintains hundreds or even thousands of escrow accounts as multifamily investors do or when they must continually open and close accounts like 1031 exchanges, the magnitude of this burden can be overwhelming. With the introduction of online sub-accounting platforms over the last decade, the situation has improved, but not as much as it could. We are now on the verge of another revolution in escrow management. Call it Escrow Management 2.0.
Escrow management 1.0: the subaccount revolution
As with so many banking activities, escrow management took a leap forward with the advent of the Internet. Banks partitioned master accounts into a series of separate sub-accounts, which require much less interaction to manage. By making these accounts available online, they in effect converted major escrow management tasks into self-service activities.
For instance, sitting in front of their computers, account holders could create as many escrow subaccounts as they liked, deposit funds for these accounts into a master account, and then allocate them to the appropriate sub-accounts for reconciliation and posting. If they misspelled a name, they could go in and correct it on their own. Account holders could also generate reports to verify account activity, document interest accrued and highlight unallocated funds. And when they closed a subaccount, the system automatically calculated the payout amount and moved the interest to the master account, where it could be disbursed. All of these transactions could be performed without any intervention from the bank.
Moving escrow to a self-serve, sub-account system also gave users a great deal of flexibility. They could assign a different rate of interest to each sub-account and set it to calculate and post interest on a monthly, quarterly or annual basis. Regardless of the requirements, the system generated the appropriate end-of-year tax form.
Finally, an online sub-account system gave users a window into their escrow activity on a number of different levels. At the master account level, they could look at their escrow position in aggregate, or dive deeper into individual subaccounts. All account activity was clearly visible, easily traceable and readily available.
Switching from online functionality to meaningful user experiences
While online sub-account platforms have gone a long way to reducing the back office overhead associated with escrow management, they are far from realizing their potential. Even the best Escrow Management 1.0 platforms require a surprising amount of duplicative effort, manual entry and paper shuffling. For instance, an apartment building may have 400 units, but in many platforms, account holders must reenter the building address on account-opening forms each time a new tenant moves in. And because many systems don’t accept W-9s digitally, organizations are still sending them to their banks by mail, email or even fax.
In an age of artificial intelligence and consumer apps that effortlessly anticipate a user’s preferences, escrow management systems look surprisingly primitive. Their appearance holds the clue to their underlying drawback: in Escrow Management 1.0, platforms were designed for functionality, for instance, to give users a way to create an account or allow 1031 exchange customers to manage the interest rate that their customers can earn. In Escrow Management 2.0, designers have not abandoned functionality; rather, they are building functionality to support the user experience.
In doing so, the best escrow account application developers are turning to a new wave of product design and delivery methodologies, including human-centered design and agile delivery. Traditionally, product development focused on delivering features and viewed design as an afterthought for creating a beautiful product experience. This resulted in solutions that are functionally adequate but neither easy to learn nor use. For these designers, the user serves as a touchstone throughout the development. And rather than make assumptions about user needs and preferences, the design team engages account holders at every stage of the product development cycle.
Escrow management 2.0: how we’re innovating
Escrow account platforms that better reflect the way account holders work are beginning to work their way into the marketplace. They are distinguished by responsive functionality and ease of use. And because the architecture of the best of these supports incremental change, they will improve as time goes on. Here are some features you should look for:
Flatter navigation to improve ease of use. Instead of having account managers work through a series of screens to accomplish the various tasks required to maintain a single account, the new escrow management platforms consolidate related tasks on a single screen.
Memo posting of interest to allow same-day withdrawals. This feature is being implemented with the 1031 escrow manager in mind. When clients are on a tight deadline and need their funds for closing immediately, they can deliver.
Templated account opening screens to save time and reduce error. Multifamily operators can create templates for their larger buildings, streamlining the sub-account opening.
On-demand subaccount statements for real-time documentation. When there is a question about activity in a sub-account, users can create real-time customized statements, providing a snapshot of a sub-account activity.
Customizable fields for better reporting. The best of the new escrow management applications allow users to determine the fields they need for a report, enabling them to generate the most relevant information for their needs.
Introducing these features has often required banks to make deeper, more substantial changes than simply revising their interface to make it more attractive, logical, or easier to navigate. They have also had to make changes in their own back office processes so that they better mesh with the workflow of their escrow management clients.
For instance, escrow management designers are zeroing in on the W-9 bottleneck and are developing ways for customers to upload them through the application and to track their progress through the approval process. They are also building capacity in the platform for bulk subaccount openings. Currently, most banks have limits on the number of subaccount openings they can accommodate on a daily basis.
Online commercial escrow in a new light
These innovations and others like them mean that the next generation of escrow management applications will be dramatically more responsive than the ones available today and that their functionality will be much more meaningful for account holders. As they streamline and automate routine and repetitive processes and generate insight and intelligence about an organization’s escrow accounts, they have the potential of elevating escrow management from a mundane part of doing business to a source of strategic advantage.