In online trading, which most people experience as e-commerce (trading money for goods), there is an important service that banks and money transfer services, such as PayPal, provide. In general, not is it only not advertised as a service, but it is downplayed. This service is one of pseudo-escrow. If two people want to trade in person, they can hand each other their physical items at the same time. Even if the two parties don't trust each other, they can be reasonably sure that if they give up the item they are trading away, they will be able to get the item that they are trading for. With online transactions, when you send the item that you are trading away, you just have to trust that the other party is going to follow through with their half of the transaction. When trading money for goods (or services) online, the credit card company or money transfer company creates the illusion of an instant transfer of money from the buyer to the seller. In fact, however, the transfer is not immediate. Credit cards don't take the money right away (they bill), nor do they deposit the money right away (merchants receive the money at the end of a billing period.) If the buyer doesn't receive his goods, he can file a dispute with the credit card company, which will then initiate a charge-back, which will take the money back out of the seller's account and credit it back to the buyer's account. Paypal comes closer to an actual instant transfer of money, but because they reserve the right of a charge-back as well, the transfer can be undone at a later point.
This is a very useful and important service to provide, and it enables trading between untrusting partners (or just people who have no reason to trust each other) in an environment where the "1... 2... 3... trade!" method of trading doesn't work. There are two downsides to this arrangement, though. The first is that this pseudo-escrow service comes with a fee that is built in to the transaction. For credit cards, the merchant pays the fee, and generally passes that on to the customer, and with PayPal, the fees may be payed by one or both of the parties, depending on the funding source and what kinds of accounts they have with PayPal.
The second downside to this arrangement is that the arbitration attached to this pseudo-escrow service is very coarse grained. In order to minimize costs for the companies providing this service, there is no mechanism for any sort of arbitration hearing built in. If you want that kind of escrow, you'll have to do it with another outside service, and you'll pay correspondingly higher fees for that level of service. For the credit card company, or for PayPal, they take into account only one or two inputs (the fact that the buyer filed a complaint, and possibly the complaint history of the two parties.) The decision is completely up to the money transfer company, and is completely non-transparent.
Since it is non-transparent, you really need to trust the money transfer company. This means that the money transfer market is forced to be effectively very small, and this leads to the fees being relatively non-competitive, as well as coarse grained. If you want to transfer money, you pay the fees that support the pseudo-escrow mechanism that everybody on average needs. If you want a more transparent escrow system, you'll have to pay for that in addition, because in order to get the money to the escrow provider, you still pay the fees (maybe indirectly) to get the money to the escrow provider. If you are dealing in trades either small enough that you are willing to absorb the risk yourself, or you are dealing with parties that you already trust, you still have to pay the fees for transferring the money.
This is the case where Bitcoin can fill the gap. By providing a mechanism for zero cost transfer of money, you no longer have to couple the escrow service with the money transfer service. If I require no escrow because I trust the other party, or am willing to absorb the fraud risk, I can transfer the money without paying the fee to subsidize escrow. If I require more full featured escrow, I pay just for that service, without paying for the escrow that is built in to traditional money transfer services. And because you no longer have to trust a third party for the money transfer, the barrier to entry for escrow services becomes lower, and therefore you can have much more finely grained levels of escrow offered.
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