The rise of on-demand streaming has begun altering music banking strategies, including the financing terms banks offer artists and labels for a recording project.

The booming growth of streaming has also encouraged banks to place early bets on aspiring artists who gain traction on Spotify and other services.

The music industry reaped $2.5 billion in revenue in 2016 from on-demand streaming, according to the Recording Industry Association of America. The growth, for the first time, pushed over the 50-percent mark in terms of industry revenue. As consumers have changed the way they listen to music, banks have changed their financing offerings, according to Andy Moats, Pinnacle’s executive vice president and director of its music and entertainment division.

Pinnacle bulked up its music banking division when it closed on the purchase of Avenue Bank last year. Avenue was founded with music banking as a centerpiece. The company raised capital from local music executives, hired bankers with music industry experience, including Moats, and had a board of directors that included Music Row veterans Joe Galante, Ken Robold, Steve Moore and Kix Brooks.

At the time of the acquisition by Pinnacle, 24 percent of Avenue’s loans and between 15 and 20 percent of its deposits were from its music and entertainment division.

In the fourth quarter of 2016, Pinnacle’s music division saw a record $58 million in new loans from the division that Moats oversees.

Moats said a primary change in music banking has been that streaming royalties for record labels have a longer shelf life. It used to be a financing deal was put together around an album release with shorter terms anticipating immediate revenue coming in centered around the release date. Now, an album can enjoy streaming revenue over many months or even years.

The payout is smaller up front, but the bank can offer longer-term loans anticipating that whether it is financing a single album project or offering credit to a record label.

“We’re one of the first banks in the country to begin lending with digital royalty as our collateral since of repayment – think interactive or non-interactive royalties,” Moats said. “The record label side is starting to look a lot more like publishing because of the long-tail of revenue.

“So you may not get $10 or $20 upfront today, but you’re making pennies over a long period of time. So if you need to unlock some of the liquidity in that success, you can, and then redirect those royalties to repay our loan over a long period of time.”

The goal for a music division is not simply to finance the creative project for an artist. Pinnacle, and other music banks, hope to turn creative clients into customers on the more traditional banking products. So the artist who received a loan for his album and then goes No. 1, hopefully chooses Pinnacle to be their bank for a car loan or mortgage.

And artist manager Greg Hill of Hill Entertainment Group said banks are incorporating data from streaming services into their financing decisions. For instance, a young artist gaining traction on Spotify may not have the immediate revenue to justify a car loan.

But, Hill can show a banker data, including number of monthly streams, playlisting growth and increases in an artist’s followers on Spotify, to justify a fan base that will lead to real revenue down the line. Hill said City National Bank recently offered a loan for his ascending artist Cole Taylor when he was in the infancy of his career because of his streaming success. Since then Taylor has co-written two No. 1 songs, signed with live entertainment giant WME and appears poised to be a breakout country star.

“It is much easier for me to make the case for why a bank should get behind a young artist when I can point to real data and say, ‘Look, this guy is going to be a star,’” Hill said.

AUTHOR Nate Rau