Blockchain for loyalty points: How would it work?

4 Sep 2019

More than half of all consumers in the US belong to some sort of loyalty programme, which businesses have used for years as a way to strengthen their relationships with customers and provide incentives to keep them coming back for more. But the long-established way of tracking and rewarding loyalty via points or miles comes with drawbacks for both companies and end users.

Just as blockchain could potentially help with everything from health records management to e-sports betting, the technology could also solve today’s loyalty programme challenges, some advocates say.

For example, one of the problems with current points/miles loyalty systems is that they’re complicated (and costly) for businesses to set up and run. End users, meanwhile, often find themselves limited in how they can use their accumulated rewards, which often leads to points and miles going ‘unspent’. And that isn’t good for either consumers or businesses (unused points often sit as liabilities on companies’ balance sheets).

So how could blockchain enable better loyalty programmes? Many proposed systems would reward customers not with points or miles but with blockchain-based, cryptocurrency-like tokens. Users could accumulate these tokens to spend on future purchases or to exchange for other things of value.

Such loyalty tokens, noted a recent paper from the Boston University School of Hospitality Administration, “are similar to loyalty points; however, blockchain technology enables customers to freely buy, sell, or exchange their loyalty tokens with others. Allowing customers to exchange loyalty points in an open exchange can also increase the competitiveness of loyalty programmes and increase overall service quality”.

An experiment that rewarded on-campus purchases at the University of New South Wales with the cryptocurrency Ether concluded that such a system has “the potential to drive much deeper engagement with a programme by solving a number of the limitations inherent in miles and points-based programmes.”

“While some members drew comparisons with cash, the overwhelming opinion from members indicated they felt cryptocurrencies were more exciting and desirable due to value fluctuations (‘you never know what to expect the next day’) and the potential for a significant future value increase (‘there’s an element of speculation and potential that makes it exciting’),” wrote researchers Philip Shelper, Andrew Lowe and Salil S Kanhere. “It is also telling that 67 per cent of participants chose to hold (or HODL) their Ether rather than cash it in. In that sense, we argue cryptocurrencies injects a unique and highly-engaging gamified element into the programme which is absent from points and miles programmes, and cash programmes.”

While some commercial blockchain-based loyalty programmes are already available – Loyyal (working with IBM), Qiibee, the DigitalBits Project, KrisPay (developed with KPMG Digital Village and Microsoft) – and others are coming (Momentum, Rakuten Coin), there are plenty of issues with such systems that still need to be resolved.

“Such platforms would add a transaction layer between consumers and programme operators and merchants, likely generating a small per-transaction cost, which could grow over time, much like OTA [online travel agency] fees,” according to Oliver Wyman consultants Dan Kowalewski, Jessica McLaughlin and Alex J Hill. “Customer data, a loyalty programme’s most valuable asset, could become available to other network participants, even competitors. Currency devaluation is another risk in what is essentially an open marketplace for points trading.”

Noting that more research is still needed, the authors of the New South Wales study pointed out that token-based loyalty systems – if they enable rewards to be used with multiple businesses, rather than just one – could also dilute the appeal for companies that prefer to keep customer rewards in-house.

“Some merchants may not appreciate that the cryptocurrencies earned within the programme can be transferred externally, rather than reinvested with them,” Shelper, Lowe and Kanhere wrote. “This issue can be offset via quality customer experience design in two ways; firstly, by making it really easy and worthwhile to spend with the merchant, and secondly by allowing the member to transfer other cryptocurrencies into the eco-system to be easily spent with the merchant.”

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