In the abstract, payments seem easy enough. In exchange for a good or service, one person will pay another, either by handing over paper money or using an electronic payment method.
In reality, however, payments can be very complicated. Electronic payment methods rely on an extensive infrastructure maintained by various entities, both governmental and private, operating under a dense web of rules and regulations.
The situation gets even more complex when payments move between multiple parties and across international borders. Then when you add in arcane lending procedures, difficulties determining who is owed what when, a burgeoning gig economy, and a massive underbanked population, the payments ecosystem quickly becomes exceptionally complex.
In response to all this complexity and the related pain points, some companies are leveraging technology to improve various aspects of the financial services industry. These companies, known as fintechs and mainly comprised of young start-ups, are innovating across many industries, from streamlining lending practices to helping underbanked people transact.
One industry that epitomizes this dynamic—a wildly complex payments ecosystem being gradually improved by young companies leveraging technology—is the music industry. To learn about the payment-related pain points in the industry and how technology is being brought to bear to solve them, PaymentsJournal’s editor-in-chief Ryan McEndarfer sat down with Milana Rabkin Lewis, co-founder and CEO of Stem.
Knowing who to pay is the first pain point
For musicians, the first payment-related pain point comes right away. Since making music is often a collaborative endeavor between song writers, musicians, producers, and a retinue of other creative types, determining who is owed what can be difficult. The collaborative process also extends beyond just the recording session, with songs needing to be edited, re-worked, and mastered, further complicating efforts to establish who is owed money.
The problem is made worse by the fact that artists typically record far more songs than actually get published. For every standalone single, short EP, or full length album, an artist could have numerous unpublished songs, perhaps numbering in the hundreds.
“So initially, the pain point is just helping the artist memorialize who is actually in a recording session and what the splits are on the song,” explained Lewis. “I can’t tell you how many artists forget that.”
Copyright laws make the situation even murkier
The second pain point identified by Lewis revolves around the rights to the song: “There’s two copyrights; there’s the sound recording and the publishing.”
A myriad of rules, regulations, and dense legalese determines how money is allocated based on these publishing and recording rights. The situation is so complicated that Lewis decided not to delve into the copyright weeds out of a concern for diverting the entire conversation down that rabbit hole.
“It’s going to take the entire session so I’m not going to,” said Lewis. But, she continued, “the point is that there’s crazy regulations related to the logic of how each piece of copyright gets paid out, what organizations can collect on them, and how the streaming services are required to allocate the funds between the two copyrights.”
Music is global, meaning payments can be cross border
If the payment situation was not already complicated enough, the global dimension of modern music adds additional challenges. When an artist releases a song on a streaming platform, the song is often streamed by listeners in markets all over the world.
Therefore, when it’s time for streaming platforms like Spotify or Apple Music to pay artists, “we get paid out in multiple currencies for the same song,” said Lewis. Due to exchange rates and different fees associated with cross-border payments, this process can eat into the musician’s profits. “We want to be able to minimize the loss there,” she explained.
Musicians are often underbanked
The final pain point mentioned by Lewis had to with the underbanked.
In America, a large portion of the population either doesn’t have a bank account or only has limited access to normal financial services. A recent report from the Federal Reserve estimated that 22% of the U.S. population is underbanked, meaning that almost 55 million Americans do not have full access to typical banking services.
In the music industry, this can obviously cause issues when payments are involved. “Most people don’t think of musicians and their collaborators as being underbanked,” said Lewis, “but they are.”
She recounted how when Stem first started, it had set up its payment structure to operate over the ACH Network. This works well enough when the recipient has a bank account, but many musicians, especially younger ones, lack a bank account.
After working with a young, promising YouTube star who did not have a bank account, Stem realized that ACH alone was “not going to be sufficient for our user base.” The company then began supporting payments through Venmo, Cash App, and a range of other digital services.
Securing loans can be hard for musicians
With many musicians being underbanked, securing loans from traditional banking channels is a challenge. Even musicians with bank accounts can find it hard to get loans.
Artists often have irregular paychecks and schedules, making it difficult to establish solid credit profiles. Sometimes artists get paid on commission, while sometimes they may earn a flat percentage fee from the earnings of one project. When there is a lull in touring, as is the case now with COVID-19 shutting down live events, many artists see their income temporarily dry up.
When other professions need a loan, they can often secure one through the value of their assets, be it a building, an expensive piece of equipment, or equipment. But for artists, their assets are the songs themselves. This means that for up-and-coming musicians, traditional banks are unable to quantify how much songs are worth.
Given this reality, “when it comes time for the artist to grow their business, they’re not able to go to a bank and get a small business loan to be able to invest in themselves as an artist and musician,” explained Lewis. This is a serious challenge for artists because many need to invest in better equipment, while others may want to attend music school to improve their skills.
Aware of all these challenges, Stem set out to help artists better finance their futures through its Scale platform. “Because we have the data from the streaming services on the value of the asset, the song, whether it’s Spotify, or Amazon or Apple, Google, YouTube, any digital revenue stream, we now know what that asset is worth,” said Lewis.
To predict how much a song will be worth, Stem crunches reams of data, including the song’s genre, the artist’s age, how many playlists the song has been added to, and a variety of other helpful metrics. “We use that data to be able to give them a pipeline advance on their earnings anywhere between six months to 36 months,” said Lewis.
She stressed that unlike traditional record labels and other industry giants who ensnare artists in predatory contracts, Stem is transparent and upfront. “What was really important to us was to make sure that the artists knew what they were giving up in exchange for the money that they were taking.”