Exclusive: New Company Looks to Improve Digital Sales' Bottom Line By Lowering Credit Card Fees

A system designed in the '70s isn't helping an ailing digital music sales industry.

Digital commerce has presented the music business with two key problems: First, credit card fees hamper direct-to-fan sales, and second, large online retailers like iTunes don't give sellers their buyers' personal information. Payment-processing compay Cardis wants to kill two birds with one stone.

The platform will incorporate the company's technology that reduces the fees that sellers pay for processing payments. The white-label platform will also provide sellers with valuable customer information such as email address and location. 

Nebo Djurdjevic, chief operating officer at Cardis, says the company is trying to fix an outdated process. Today's low-priced digital goods are incompatible with the traditional way of charging purchases. A significant portion of the sales price is lost when a seller is charged, say, 2.9 percent of the sale price plus 30 cents.

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Here's how it works: When a customer makes a purchase on a website or app powered by Cardis, that payment is bundled with other purchases made by the same customer before being sent to the issuing bank. Thus, a few small transactions are treated as a single, larger transaction with a single credit card processing fee.

"Keep in mind, the payment networks we have today are based on what was deployed in the '70s to process credit card transactions with $100 transaction amounts," says Djurdjevic. "A $1 transaction in a network designed for $100 transactions makes it extremely expensive."

It's a system that works -- as long as consumers want digital downloads. Year-to-date digital sales in the U.S. are down about 12 percent, according to Nielsen Music, and the trend is likely to continue. At the same time, consumers are flocking to streaming services like Pandora, Spotify and YouTube, sending trade revenues from these services up 28 percent to $859 million in the first half of the year, according to the RIAA.

Cardis chief executive officer Aaron Fischman isn't deterred. Fischman believes the download has a place in the midst of streaming growth. He points to Taylor Swift's departure from Spotify, and insists clients want to also higher-priced goods like merchandise and tickets. "It's about more than music, but the song will bring the traffic."

It's a model that requires the most avid fans to be repeat buyers. After all, saving any money would require frequent purchases by the same customer. After all, Cardis saves clients money by grouping together multiple orders. A single order during the period -- clients can choose the time or spending limit that prompts Cardis to send the payment for processing, according to Djurdjevic -- wouldn't save money.

Still, an executive of a music company already using the platform says the savings can be substantial. "We're saving like 70 cents on each transaction," the executive tells Billboard.

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It helps that a company can bundle customer orders across multiple properties. Wayne Barrow of ByStorm Entertainment, which represents the likes of J Cole and Miguel, says the platform could extend across its various properties such as the company website, artist websites, apps and websites of clothing lines. "Anywhere our consumer base already exists."

The consumer information has real value, too. Any label or artist that knows how to reach fans that have bought a download or piece of merchandise is more efficient with its limited resources. This feature is far less impressive then the cost savings related to credit card transactions, however. Major retailers like iTunes and Amazon do not provide to artists or labels the email addresses of buyers. But the collection of buyer information has been a staple of direct-to-fan commerce. Services such as Topspin to Bandcamp have allowed artists have build email lists and perform geo-targeted marketing.

Credit card fees are an unlikely entry point to the music business. But the fact that Cardis would go after music clients speaks to the realities of today's business. Recorded music revenues are in flux as streaming services replace downloads and CD sales. Artists and labels need to look for news ways to generate revenue and save costs. The new music business demands new approaches, says the first music executive. "No way a major artist can survive or record and market an album on streaming revenues."


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