Can blockchain improve loyalty points programs?

With the rise of cryptocurrencies and blockchain technologies over the last few years, there’s been a lot of discussion about how existing systems will be improved and even transformed. For ecommerce, there’s been discussion about crypto changing payment processing (especially for international transactions), decentralized marketplaces, and new digital assets (such as cryptokitties and other non-fungible tokens). Another topic of interest is the use of blockchain loyalty points programs.

While there’s been a spike in interest recently, after the Japanese-based marketplace Rakuten’s announcement that they will transform their points program into a blockchain-based cryptocurrency, it’s also been one of the most popular areas for crypto marketing projects. Many believe blockchain will take over and transform loyalty programs, yet there are a number of challenges, and it’s not entirely clear that blockchain is a better system than points.

Rakuten Coin Announcement

top cryptocurrencies 04.25.2018Rakuten’s recent announcement received a good amount of attention. In most articles, the headline included a figure stating an equivalent dollar value of roughly $9 billion, which certainly helps to grab attention.

At that value, Rakuten Coin would be the 6th largest cryptocurrency by market cap as of today, based on the numbers from CoinMarketCap. A closer look shows that $9 billion figures is the total value of points given out over the last 15 years and presumably a good number have been spent. It also appears that some Rakuten Super Points are “limited time” and have expiration dates, making the total current value of valid points much less.

Rakuten is certainly not the first to consider company using blockchain for loyalty points programs. Earlier this year, Singapore Airlines announced plans to adopt a blockchain based airline points program. Neither has yet announced a date of when they expect to introduce their blockchain programs or any specific details of how the programs will operate.

Loyalty Point Crypto Projects

There are also a number of new crypto companies working on loyalty point projects that could be adopted by merchants. In the blockchain marketing tech landscape infographic, loyalty points are the second most popular category, as pointed out by Jeremy Epstein in a post in reaction to the announcement on TechCruch, which has since been replaced by a different article at the same link. Epstein went on to write a bit about the cost and revenue aspects behind the decision:

On the cost side, the back-end administration of a points system that was working across multiple fiat currencies led to exchange rate problems and there was an expense associated with fund repatriation. With blockchain, the potential is for this to go away.

On the revenue side, it seems that more digital goods will be available internationally. It seems that the points were previously valued in national currencies, the number of vendors who could accept points for goods was constrained.  If you wanted a good that was denominated in Yen (and redeemable for Yen by the vendor), then your Korean Won-based points could not be spent.

As I understand it (and keep in mind, this hasn’t happened yet), it was as if each loyalty program was siloed in a country marketplace.

Now, the Korean consumer will buy crypto-Rakuten points with Won and the Japanese consumers buys with crypto-Rakuten Yen, but it’s more like Bitcoin because the system it is unified on one currency basis.

Epstein continues by speculating why this wasn’t built into the program in the first place and that the value of points may increase as they are able to be used on more goods and services. Regardless of why Rakuten didn’t build their points program to easily work with multiple currencies in the first place, the costs certainly sound like a problem. Of course, as Kai Stinchcombe has written, the obvious solution is not blockchain or cryptocurrency, and it’s hard to imagine the current points program can’t be reworked to eliminate some of the exchange costs.

That doesn’t mean it can’t be a solution. There are potential benefits, and likewise, a number of challenges to overcome.

Problems with Current Loyalty Programs

Many have cited the problems with current loyalty programs and are quick to point out the benefits for consumers. Among the problems are a lack of redemption options, managing too many points programs, and no liquidity.

In an article from March 2017 in Harvard Business Review:

The result is a maze of point systems and redemption options, with cumbersome processes for exchanging points among program partners. Loyalty programs are ripe for some kind of disruptive innovation that would make them easier to use.

Last fall, Andrew Marshall wrote in Coin Telegraph:

…there is an obvious lack of a unified system which leads to low liquidity of loyalty points. Rewards are only redeemable at certain establishments and often not easily so. And of course, digitization is a must in the modern world

Likewise, in more recent post from Craig Adeyanju, he writes:

There are simply so many loyalty programs out there that it has become difficult for an average consumer to monitor every loyalty program they are a part of. Moreover, because of the numerous programs, it usually takes longer for consumers to accumulate enough points to benefit from loyalty programs. In a different report from Maritz Loyalty Marketing, 70 percent of surveyed consumers abandon loyalty rewards because it took between six and nine months to accumulate enough points to redeem rewards.

And from a post at CMO Australia:

One of the problems with points or miles is that they’re only redeemable on the products the loyalty program says you can use them on, Shelper continued. Another issue is points expire over time. On average, about 20 per cent of points expire every year. A third issue is that points over time often lose their value, or are devalued by the company supplying them.

Consumer Benefits of blockchain loyalty points programs

Perhaps unsurprisingly, each of the articles in the previous section suggested blockchain as a solution. They cited a number of benefits for consumers, including liquidity, fewer rewards programs to manage, no expiration dates, ease of exchange, and the potential for token value to increase (as Epstein also mentioned).

From the HBR article:

For consumers juggling an array of loyalty programs, blockchain could provide instant redemption and exchange for multiple loyalty point currencies on a single platform. With only one “wallet” for points, consumers would not have to hunt for each program’s options, limitations, and redemption rules.

And from CMO Australia, with a quote from the Philip Shelper, CEO of LoyaltyX, a blockchain loyalty points comany:

“Crypto solves all of these problems. They don’t expire, and can be used anywhere or be transferred into cash,” he said. “But the most exciting part is the value. Unlike a points program, where brands can create as many points as they like, there is a finite amount of cryptocurrency. So as demand increases, the price and value of currency increases as well.”

The solutions seem to assume a few things about these new blockchain solutions. Qualities similar to Bitcoin, such as a finite number of tokens and fungibilty (all tokens have the same qualities, i.e. no expiration date). Additionally, each of the solutions assumes programs are adopted by a number of merchants with the same redemption rules and that points are earned based on a percent of revenue.
Those qualities are not necessarily inherent to all blockchain-based loyalty solutions and companies will naturally look at how they will benefit from moving to a blockchain-based system.

Business Benefits

If any changes are going to happen, it needs to start from the business side. As much as consumers may not like current systems, there’s not much pressure from competitors to change systems and it’s much more likely a business would make a change to benefit the business first.

As mentioned above, there are potential cost savings. Rakuten is in a situation where they have additional costs due to exchanges rates between currencies. There’s no details yet on how Rakuten plans to reduce these costs with a blockchain solution. While crypto can reduce exchange fees, it’s unclear how Rakuten Coin would reduce costs below those of Rakuten Super Points.

Others have mentioned cost savings as well. In the HBR article referenced previously, they suggest that a blockchain loyalty program could solve an accounting issue for companies with large outstanding point values:

Early adopters could benefit considerably. First, blockchain could help relieve a large balance-sheet liability that many in the industry are facing. Loyalty programs have long relied on cobranded cards and partnerships to sell points and generate incremental revenue. But the number of airline seats and hotel rooms available for redemption in recent years has been limited by near-record occupancy and load factors. The result has been a growing volume of unredeemed points, which new accounting standards have turned into a headache: Revenue attributable to the value of loyalty points must be deferred until the miles are redeemed.

Accounting issues can be complex and it’s entirely possible a program could benefit companies as stated above. While blockchain could potentially solve an accounting issue, there’s also discussion of how smaller businesses can benefit from real cost savings. From a post at the BitRewards blog:
Small retailers and online stores, those that would benefit from repeat custom from loyal customers and brand advocates often can’t afford to maintain and renew schemes. Most attempts to run them are abandoned.
Another oft-mentioned benefit is the ease of adding partners. From the HBR article:
Blockchain would allow both large and local partners to be added seamlessly, making the crafting of on-trend offers much easier, while virtually eliminating the back-end irritations of point redemption.
Aside from direct benefits to the business, a more consumer-friendly rewards program may also help a business indirectly via the goodwill garnered from customers.

Consumer Challenges

As an emerging, unproven solution, there remain a number of risks that could more than cancel out all of the benefits from blockchain loyalty points programs.

All solutions discussed in the article sited assume that customers are comfortable using a cryptocurrency. For all of the headlines, it’s estimated that over 90% of adults do not own any cryptocurrency. There are a number of issues in crypto around user experience, security, and accessibility to overcome before gaining widespread adoption, which may prevent some customers from using a cryptocurrency, regardless of potential benefits.

Beyond being a comfortable with a crypto wallet, customers woulfd also need to be comfortable exchanging points in order to take advantage of the liquidity feature, which is broadly presented as an advantage for consumers.

Business Challenges

For businesses, there are also a number of challenges and potential risks. Many were well argued in a post by Antony Lewis at Bits on Blocks from May 2016, well before most crypto loyalty projects even had a whitepaper draft, let along millions of dollars.

Importantly, Lewis surmises that with many traditional points systems, not all points are truly of equal value.

This is great for the companies issuing them but not so good for the customer. This puts them in a grey area for fungibility (within one scheme) – yes a point is a point; but a point earned in January which runs out in August is not the same as a point earned in March which runs out in October

This is one way that a business controls the value of points. As a liability, points are pose potential problems for businesses and therefore they want control of that liability. As Lewis writes, they become the “central bank of their loyalty points.”

In summary, the companies operating the schemes control the creation, destruction, distribution, and value of points. This is good for business and loss of any point of control would not be desired.

The key here is that a liquid market for points is not desired by businesses, not that it’s not technically achievable. There are many ways to transfer points between individuals and various rewards programs, as Lewis writes:

The technology to enable this has been around forever, and is already used to distribute points between family members. Reassigning points from one person to another isn’t hard.

The decision to not allow freely transferrable points is not because it’s technically impossible.

Increased liquidity of points greatly reduces the control a business has over the loyalty programs as whole. Rather than a number of tokens expiring before ever being used, it can be assumed a greater rate will be used, albeit many exchanged rather than redeemed. For a business where points are relatively undesirable, the “loyalty” aspect of the program becomes moot, as customers quickly exchange for another token. And if a rewards program is particularly valuable, businesses miss out on a benefit of a token’s rise in value.

Technology Not the Problem

With the distinction that technology is not what’s holding businesses back from increasing liquidity of their loyalty points, it’s worth examining if blockchain is a solution for loyalty point programs. It hearkens back the sentiments of Stinchcombe, who believes “There is no single person in existence who had a problem they wanted to solve, discovered that an available blockchain solution was the best way to solve it, and therefore became a blockchain enthusiast.”

Of course, liquidity isn’t the only potential benefit mentioned, yet it’s hard to make a compelling argument that using a blockchain loyalty program to solve for something like an accounting issue is really the best solution.

Despite the problems laid out for businesses, there are too many projects and businesses working on blockcahin solutions for loyalty points to completely ignore them. There is a possibility that at least one may truly have a solution that benefits both businesses and customers, in more than a benevolent manner. In future posts, I’ll look at the viability of some of those projects.

Summary

There are many problems with points programs for consumers. Namely, there are too many disparate programs that make them difficult to manage and redeem. This is mostly intentional by businesses, as it reduces their liability and rewards the most loyal customers only. Businesses could make points more liquid and transferrable, yet have chosen to implement limits in order to keep control of the points, which act as a liability.

Blockchain technology can be used for points systems, but it’s not solving a technology problem. It was already possible to implement the consumer benefits that would come along with blockchain loyalty points programs.

With a large number of companies working on solutions, there is a possibility that one has developed a way to introduce a better program, with enhanced benefits for businesses and consumers. Though I remain skeptical, I will look into the projects in more detail in future posts.

Andrew @ EcomLoop
EcomLoop founder. I've worked in ecommerce since 2005, beginning with my own ebay store. I've run multiple independent ecommerce businesses on Magento, Joomla, and more recently, Shopify and WooCommerce. I believe marketplaces should be looked at as a sales channel and that all independent businesses should strive to build a direct connection with their audience for long-term success.

Trackbacks & Pings

Leave a Reply