In a market ready to explode under the growing popularity of online auctions, Internet escrow service i-Escrow is set to announce Monday the acquisition of its rival Trade-Direct.
Financial terms of the deal have not been disclosed, but analysts said the move should strengthen i-Escrow's position.
Online escrow services are similar to real-estate escrow accounts, which provide a trusted, third-party intermediary to ensure that buyers and sellers fulfill their agreement to one another.
After the merger, closely held i-Escrow's biggest rival will be TradeSafe, as well as auction sites that are starting their own escrow services.
Currently, less than 5 percent of all online auction users make their purchases using escrow services, largely because the average deal is valued between $40 and $50, analysts and industry executives say. i-Escrow said that the average transaction size for their service has been about $300.
i-Escrow collects a 6 percent transaction fee for any items priced less than $500 with a $2.95 minimum. As the amount increases, the fee decreases, falling to 1 percent for sales over $2,500.
Sue Rothberg, auctions analyst at research firm Gomez Advisers, expects the consumer-to-consumer auctions market to grow to $8 billion in 2001 from $3 billion in 1999. While business-to-consumer auction companies have little need for escrow services given their relationships with credit card companies, online consumer-to-consumer auction customers pay either with cash, money orders, or checks, and they have no assurance that the seller won't take the money and run, said Rothberg.
"The demand for escrow services is going to continue to grow, and I think in a significant way," said Rothberg, noting that on average consumers spend about $960 per year at auction sites. "As people get more comfortable spending money at online auctions, and auction sites begin partnering with bigger players like Sotheby's and [Butterfield & Butterfield], you'll see higher priced merchandize being purchased."
eBay recently acquired prestigious auction house Butterfield & Butterfield for $260 million.
The source of escrow services' growth won't just spring from consumers venturing online to auction sites, said Rothberg.
"There is a steady increase in the number of individuals who are operating small businesses and making a living on these auction sites," said Rothberg.
Sherman Kwok, i-Escrow president, agreed with the assessment, noting that they plan to market themselves to these "unbranded merchants."
eBay, CityAuction, and Lycos's Fairmarket are some auction sites that use i-Escrow services. TradeSafe provides the services for Amazon, Tripod, and VerticalNet, among others.
"Right now we are growing at 25 percent to 30 percent per month in the number of escrow transaction," said Kwok.
Both companies view educating people who use auction sites about their services as their biggest hurdle. i-Escrow plans to
launch a national marketing campaign later this year but declined to comment on how much it planned to spend.
TradeSafe chief executive Ken Pereira said the company had considered acquiring Trade-Direct but shelved the deal because he didn't see complementary technology benefits or a growth in market share with the acquisition.
"We are at the infancy of this marketplace," said Pereira. "The way to grow in this market is to have relationships with auction sites and to grow with them."