The businesses need to decide which type of account they would need which is suitable for their transactions. There are various parties involved in the businesses who indulge in the payment operations, for example, customers, clients, vendors, logistics, etc. The smooth money movement between them makes sure the smooth running of the business. For this purpose, it is essential that the ideal account is used. This article discusses three such business accounts for the businesses namely: Nodal account, Escrow account, and Current Account.
There is a similarity between the nodal account and the escrow account, both these accounts have one similar function of holding the third party payment.
Let us understand the differentiation and meaning of Nodal account, Escrow account, and Current account in detail.
What is Nodal Account?
The Nodal account meaning can be explained as follows:
When the customer makes the payment, it goes through various ‘intermediaries. These intermediaries include payment aggregators, payment gateway, payment processors, e-commerce, mobile commerce, etc.
Payment gateway enables the payment transfer between the customer and the seller. It provides various digital payment options for the same. However, regardless of the payment option chosen, the merchant or the seller can receive the payment in his bank account.
The nodal account is the stop for the payment between the customer and the merchant. This account would first accept the online payment made by the customer.
It is responsible for collecting the payments on behalf of the merchant and also for timely disbursement of the settlement amount to the merchant within his settlement cycle.
The settlement amount is the payment amount minus the transaction discount rate (payment gateway per transaction fee) and the taxes.
The balance in the nodal account does not belong to the payment gateway. It is the bank’s account, with the sole purpose of disbursing the amount to the merchant. Thus, it maintains the trust and safety of both the merchant and the customer and also enables transparency.
And so as per the RBI guidelines under the Payment and Settlement Systems Act, the intermediaries have to maintain this internal bank account for the collection and disbursement of the payments on time.
The intermediaries can open the nodal account with the bank providing the nodal account. The intermediaries would need to fulfill the terms and conditions in the agreement made with the bank for opening the nodal account and to be eligible for the same.
The nodal account receipts include the customer payment, the balance of the normal account that is to be converted to a nodal account, and the refund made by the merchant that is to be disbursed to the customers.
Further, the disbursements include the merchant settlements, the commission, and the customer refunds.
What is Escrow Account?
The Escrow account meaning can be explained as follows:
The escrow account is opened to hold the payment amount till the contract or the agreement terms are completed between the two parties. When two parties enter a contract, they have a third party hold the transacting amount of that contract. When the contract is fulfilled the amount is disbursed to the receiving party and if the not fulfilled then the amount is returned to the payer. This third-party account is the Escrow account.
In the case of mergers, acquisitions, real estate, selling abroad, etc the escrow account is used. The timeline of the disbursement of the amount is clearly mentioned in the contract.
Thus, it is a purpose-specific account for ‘safety deposit’ to enable security and bring down the risk.
All in all, the disbursement for the nodal account has a specific settlement cycle whereas in the escrow account the disbursement is done after the fulfillment of the contract.
What is a Current Account?
The current account meaning is explained as follows:
Every type of business can have a current account for their transactions. It is the same as a savings account, that is, it has the same functions of the debit and credit of the incomes and expenses of the businesses, deposit, withdrawal, transfers, etc.
However, as there is a liquidity aspect in the current account, there is no maximum transaction limit or interest-earning. Mostly, the businesses with a high number of transactions maintain a Current Account.
These are the three special types of accounts for the business transaction. Each of these differs from the others and has different purposes. The nodal account is between the customer and the merchant. The intermediary maintains it as an internal bank account. Within the settlement time period, the disbursement is completed. The escrow account is a third-party account and functions as per the agreement between the buyer and the seller. Lastly, the current account is a bank account for business transactions.