loyalty points on the blockchain

Why Customer Loyalty Programs are Ripe for Blockchain Disruption

Blockchain is often heralded as being the technological breakthrough that will revolutionise how we think of money and transform the financial industry. But there are many other industries and fields outside of money and finance that the blockchain is well suited to revolutionize. One notable contender is the loyalty rewards industry.

Currently, the loyalty rewards programs is a massive US$360+ billion industry that is characterised by a myriad of different programs each with its own systems for earning, redeeming, and exchanging their unique points. While the average American participates in 29 different loyalty programs, approximately half of these accounts are inactive and 30 percent of consumers never even redeem a single point according to the 2017 Colloquy Loyalty Census. These facts highlight just how ripe the industry is for change.

So why is there so much stagnation within loyalty rewards programs? In its current state, the vast majority of programs each have their own points system where your accumulated points can only be redeemed with the same retailer. This centralization of points drastically limits their value and practicality. In fact, rewards not being valuable enough is the top reason why Millennials stop using loyalty programs. Even if you have amassed $50 worth of points with one retailer, the actual monetary value is not actually $50 when you consider the limitations placed on how, where and even when you can spend your points.

In economic terms, this is referred to as the liquidity of an asset. The more liquid the asset, the more easily and quickly it can be exchanged for cash. The more liquid an asset, the more valuable it is to people. For instance, it has been found that increasing the liquidity of an asset can increase its monetary value by up to 22%.

Liquidity gives loyalty points super powers. Creating a transferable points system for a businesses allows their members to trade with each other, trade with other businesses, and even redeem their loyalty points for cash.

It also provides an open protocol for businesses to collaborate in a trustless manner. Imagine airline loyalty rewards without a centralized entity and redeemable on any airline.

Retailers that become early adopters of this technology are likely to reap the rewards as they attract more customers to their superior rewards programs. The more valuable the points people are earning, the more willing people are going to be to spend more to earn more as well.

Some retailers have already recognised the potential in this solution. Airlines Cathay Pacific, Singapore Airlines and Lufthansa have all invested in blockchain technology with the first two launching blockchain-based loyalty wallet apps. This isn’t just limited to airlines though. EZ Rent-A-Carhas a loyalty rewards program that lets their members exchange points for cryptocurrencies. Hewlett Packard Enterprise and Japanese e-commerce giant Rakuten are also both working on creating loyalty programs with their own tokens and allowing consumers to exchange these for other cryptocurrencies or cash.

The problem can be trying to differentiate genuine attempts at innovation in the field and those companies merely attempting to gain free publicity. While there’s certainly going to be those in the latter category, there is genuine effort to revamp the industry.

For example, the University of New South Wales in Australia and experimental loyalty agency LoyaltyX recently teamed up to conduct a seven week trial of a new cryptocurrency loyalty rewards program. The program, called ‘Unify Rewards’ enabled students to earn $5 of Ether for every ten transactions made at any of the twelve participating retailers across the uni’s campus. Students participating in the trial had four options: redeem the acquired Ether for cash, transfer it to another participant, redeem it for a gift card, or transfer it to their own Ethereum Wallet. In a sign of support for the wider crypto field, a majority of students (two thirds) chose the latter, with just five percent opting for a gift card. The remainder chose cash. When participants were surveyed 86 percent of participants felt that earning cryptocurrency was more appealing compared to points as part of a loyalty program.

The simple fact that these kind of studies are happening shows that the industry is starting to take notice and make change.

This change obviously also possess various risks for retailers. By giving customers points that can be exchanged for things other than the retailer’s own products, the lock-in effect of loyalty programs will likely diminish. No longer will consumers be forced to only spend their points with the same retailer, but will be free to spend them with whoever they like. This point along will make many retailers resistant to issuing transferable points instead of their own points only redeemable within their own walled gardens.

Additionally, a blockchain solution will stop retailers from kicking people off their program and cancelling their points should they be abusing the system. Companies will also not be able to change the value of the points in the future as easily in response to changing circumstances. In short, by moving loyalty reward programs over to the blockchain, retailers are giving away a lot of their power in the process.

This is not to suggest that the cons outweigh the pros, simply that there are a range of different positives and negatives involved. Retailers who embrace this change will likely experience increased sales from new customers looking to get more value back for their loyalty. If executed well, this will more than outweigh the cons.

Whether retailers embrace or resist this change, it is clear that the blockchain revolution is coming and that a countless number of industries are going to experience technological disruption as a result. The customer loyalty market especially so. Companies can either embrace change and remain agile or resist and fall behind the competition as a result. Only time will tell exactly how this will all play out.

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