The Emergence Of Escrow Payments In E-Commerce Transactions In Nigeria

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The Nigerian e-commerce sector continues to evolve and experience rapid growth and changes. Businesses operating in this sector, however, experience a number of challenges...
Nigeria Finance and Banking
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The Nigerian e-commerce sector continues to evolve and experience rapid growth and changes. Businesses operating in this sector, however, experience a number of challenges, one of which includes the downside of the Cash-on-Delivery (COD) payment option. As a result, several e-commerce giants in Nigeria have suspended COD on their platforms due to rising operational costs and negative impacts on business profitability. These problems stem from high rates of cancellation by customers who fail to accept and pay for products at the time of delivery and increasing security risks faced by their delivery staff. In response to these challenges, escrow payments are currently gaining traction in Nigeria, particularly for online businesses. This is because they offer a more secure way to conduct transactions by protecting both buyers and sellers, addressing the challenge of trust in online transactions.

This newsletter highlights the growing adoption of escrow payments and its usefulness in Nigeria's e-commerce sector.

What is an Escrow?

Escrow is a legal concept describing an arrangement where an independent party (the "Escrow Agent") holds funds or assets in trust on behalf of parties to a transaction until certain obligations or conditions in respect of that transaction have been fulfilled, after which the funds or assets are released to the entitled party by the Escrow Agent. Escrow transactions are quite common in the financial services sector where banks are appointed to act as Escrow Agents. In e-commerce transactions, the Escrow Agent collects and retains the buyer's money until the seller fulfills its obligations. Once the buyer receives the product or service as agreed, the Escrow Agent releases the funds to the seller. This protects and balances the interests of both buyer and seller.

How Does it Work?

For online marketplaces, buyers and sellers agree on the terms and conditions of the transaction, including the use of escrow services. The buyer then deposits the funds with the appointed escrow agent. Once the seller delivers the product or service, the buyer confirms receipt and satisfaction of the order. Upon confirmation, the Escrow Agent releases the funds to the seller.

What is an Escrow Account?

The Escrow Account is a temporary holding account managed by the Escrow Agent, separate from the buyer and seller's accounts. The Escrow Account is used to warehouse received funds and cannot be accessed by either the buyer or seller.

Who are Escrow Payment Service Providers?

Escrow services are provided by financial institutions in Nigeria such as traditional banks and financial technology (fintech) companies. ICT services companies also provide escrow payment services through partnerships with banks, as they are not licensed to hold customers funds directly. They maintain deposit accounts with banks in their corporate name where the escrow funds are secured. E-commerce businesses integrate trusted escrow payment API into their platforms to automate the escrow process to offer their customers a more secure payment option, build buyer trust and potentially increase sales.

What are the Laws Regulating Escrow Providers in Nigeria?

There are no specific laws yet regulating escrow service providers in Nigeria as the sector is still evolving. However, they generally operate under regulations set by the Central Bank of Nigeria (the "CBN") to ensure consumer protection and adherence to anti-money laundering (AML) practices. Financial institutions and platforms that keep escrow accounts or hold funds in escrow need to comply with consumer protection regulations to ensure fair and transparent practices. Section 2 of the CBN Consumer Protection Regulation 2019 (the "Regulations") imposes a duty on relevant financial institutions and CBN-regulated entities to ensure that non-regulated entities they service or enter into service agreements with, comply with the provisions of the Regulations on fair advertisement practices, pre-contract disclosures and general good business practices. These include that:

  • advertisements must be factual and not misleading, deceptive or not exaggerate the quality of the products being advertised.
  • details of the cost of a product or services, including fees and associated charges, must be fully disclosed.
  • disclosures must be made regarding potential variations in foreign exchange or interest rates due to market conditions, minimum balance requirements, and other transaction limitations.
  • businesses must operate in a responsible, professional, and ethical manner.
  • businesses must provide clear channels for customer inquiries and complaints.

Also, it is industry practice for sellers, customers and the escrow agent, usually a traditional bank, to execute an Escrow Agreement, detailing the specific rights and obligations of the parties involved and the conditions for releasing the funds.

What are the Benefits of the Escrow Payment Option for E-commerce Companies?

  • Increased Trust: Escrow builds trust between buyers and sellers as buyers are assured they will not pay for undelivered or substandard goods, and sellers are guaranteed payment upon fulfilling their obligations.
  • Increased Sales Conversion Rates: Customers are more likely to make purchases knowing that their money is secure in escrow and will be refunded by an independent party, with minimal efforts by the buyer, where the seller fails in its obligations.


Escrow payments offer a promising solution to challenges faced by e-commerce businesses in Nigeria and provide protection to buyers against fraud. While there are currently no specific regulations governing escrow payments in Nigeria, it is expected that the CBN will issue directives or guidelines to regulate this evolving market in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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