Loyalty on the blockchain

A closer look at the customer loyalty blockchain use case

There has been a lot of hype around blockchain. The first and most successful use case of blockchain has been the Bitcoin blockchain. This has prompted a lot of discussion of how blockchains can be extended to the enterprise, and a horde of use cases have been identified as potential ‘enterprise blockchain’ use cases. As with everything which is hyped, a ‘disruptor’ status has been accorded to blockchain, and this has further fueled attempts to develop and implement technology solutions based on the blockchain in the enterprise. POCs (Proof of Concept) have been kicked off across industries right from digital identity management to supply chain.

Source : Gartner — Blockchain Use Cases by Verticals

The beauty of the Bitcoin blockchain is that it is Decentralized (no one controls it), Permissionless (open to public participation without any permissions) and Trustless (one need not trust another before transacting, the network manages this), amongst many other notable characteristics (immutable, secure etc.).

Herein lies the dilemma

Inherently, businesses do not work this way. They are Centralized (in control of their processes, data and decisions), Permissioned (you need specific permission to perform tasks within and with the business) and Trust-based (businesses need to build trust with each other through relationships, in a B2B transaction scenario).

Hence, while I am of the opinion that blockchain can be truly transformative in the public peer-to-peer and government transparency areas, it is with great skepticism that I look at the ‘blockchain’ in the business context, and have often wondered if

  • there is a real compelling need for blockchain technology in the enterprise
  • it is as ‘disruptive’ in the business context as made out to be

It was with this dilemma that I started looking at one of the use cases that was suggested early on — Loyalty programs.

Considering that, in its simplest form, a blockchain is a distributed ledger, pushing customer loyalty programs onto the blockchain seemed to make perfect sense, given that the loyalty database is largely a ledger of loyalty transactions. Some transactions add points (earn / accrue) and some remove points (burn / redeem), thereby maintaining a loyalty member’s points balance, akin to a bank’s ledger of deposits and withdrawals. Loyalty points resemble currency and share earn and spend characteristics with cash.

Having implemented a few loyalty solutions, in the process gaining a fair idea of how loyalty programs are structured, and more recently having dabbled in blockchain, I thought it would be good to try and look at where blockchain could really help in the loyalty context, and if it indeed was disruptive in nature.

First, though, a quick look at how loyalty stands today

The good and the bad

Some of the consistent demands from customers have been to

  • Personalize rewards and increase relevance
  • Keep the rules simple
  • Not make them wait forever to start using their points for rewards
  • Make it easy to use by focusing on mobile

There has always been pressure on Marketing to justify ROI on loyalty programs. Marketers are continuously looking at ways to improve customer engagement, while trying to keep costs of running the loyalty program low.

The lure of blockchain was to address some of the issues that loyalty programs faced with respect to customer engagement and relevance, while trying to bring in a shared cost model.

The expected benefits

  • Increase interoperability of loyalty programs (exchange of points between programs), thereby providing better options for customers
  • Increase ease of accruing and redeeming for members (earn and spend without wait times through a network of partners)
  • Spread liability across the network (points are a liability for the host of the loyalty program as they are treated as deferred revenue)
  • Cost saving through distributed infrastructure
  • Reduce operational costs because of a shared ledger (reconciliation, partner billing etc.)

Apart from the above, some of the key assumptions are:

  • Businesses want to allow their points to be an ‘exchangeable’ currency
  • Businesses are okay with customers not redeeming points against their own products or services
  • Cost savings will exceed ‘points breakage’, which averages 10% to 20% and can at times go higher than 50% in some cases like frequent flyer programs (these are points that expire without customers redeeming them)

In reality

  • Exclusivity matters — Many of the large, well established loyalty programs do not even allow points to be transferred between their own members within the program (unless you are in a household), let alone outside of the program. They want to be in absolute control of the points (liability) they manage, and the value of the points.
  • Redeeming ‘within’ and managing ‘breakage’ to drive revenue — Loyalty is also seen as a means to drive ancillary revenue and so there is a reluctance to let points be redeemed outside the business. Programs also profit from breakage, which reduces once you have a plethora of partner redemption options. Of course, programs need to balance ‘breakage’ with ‘engagement’. Having high breakage just means customers are dis-engaged, which is bad for business. Finally, being part of a coalition loyalty program does not guarantee success, as evidenced by the failure of Plenti.
  • Similar minded partners — Many of the large programs already have a partner ecosystem where points can be earned and redeemed. This is a closed ecosystem with well defined agreements and billing rules in place. There are definite steps for onboarding partners, and branding and scale play a large part in choosing partners.

So, what does that mean for the blockchain use case?

Public blockchains (Bitcoin, Ethereum etc.) are of no use here because they are, well, open to anyone and don’t have the necessary governance to support closed B2B2C ecosystems. So, we are talking about permissioned, private or consortium type blockchains here.

Architecturally, a blockchain is a multi-party driven system and is well suited for a network of participants. Hence, the first and foremost qualification for a loyalty program to be on a blockchain is that there is a network or ecosystem of participants in the program. In a loyalty context, these are partners or alliances that a program typically ties up with to offer members more earn and burn opportunities. Standalone programs with no partners have really nothing to gain from a blockchain solution. So, the best possible loyalty use case that fits the blockchain paradigm is ‘Partner Management’ i.e., managing the partner ecosystem within a loyalty program.

Loyalty Partner Management

There is a lot of data that is exchanged between a partner and the host of the loyalty program. As a member transacts across partners and earns points or uses vouchers, the information about these transactions needs to flow into the program. Many of these data exchanges occur through file based batch uploads. Validations, reconciliations, preventing double spends, identifying fraudulent transactions, audits and billing partners are a considerable overhead. Typically, this also introduces a ‘wait time’ before the member can see or use the points, which makes for bad customer experience. Recording and approving transactions on a blockchain, and smart contracts for billing can bring these costs down.

A digital mobile wallet that interacts with the blockchain and holds the key to the points on the blockchain can make it easy for members to use across partners in real-time. A large program with the right set of partners could leverage this to expand the ecosystem, and enhance the value of their loyalty currency.

Singapore Airlines has recently launched a blockchain loyalty program. As transactions get added to the blockchain, behavioral analytics could be used for personalized offers in real-time.

Interoperability between programs

This is to allow a member to use points earned in one program to buy points in another program he/she is a member of. Points.com currently offers this service in a centralized manner. This service can be provided by a consortium type blockchain which could hold the points balances of a member of the various participating loyalty programs. Smart contracts could manage the exchange rates, using reference data stored on the blockchain. Each organization of the consortium would hold specific approval rights, and have permission to view only relevant data. Individual member profiles would still exist with the respective loyalty programs. Again, a wallet that interacts with the blockchain and enables exchange in real-time will make for superior member experience.

As in the above case, the ease of sharing data between participating organizations, with proper governance and controls, would lead to better understanding of member behavior, thereby enabling a much higher level of personalization.

Loyyal is one such Loyalty platform built on the Hyperledger Fabric blockchain. However, one level of disintermediation can be achieved if the participating members are nodes in the network and are responsible for the network themselves.

Multi-brand coalition loyalty

Notwithstanding the failure of Plenti, coalition loyalty programs can be highly successful (Payback). A multi-brand loyalty program with a single loyalty currency could be hosted on the blockchain, with operational benefits as in the use cases mentioned above. This could be useful for businesses that don’t want the overhead of running their own loyalty program, and would rather participate in a model where liability and costs are shared.

Loyalty platform and service providers have an opportunity here to build the blockchain solution that allows for businesses to sign up to and become participants in the network. Loyalty points could work like cryptocurrency that drives the network.

Allowing members to ‘cash out’

As a novelty redemption option, programs could provide members the option of using loyalty points to buy cryptocurrencies like bitcoin, litecoin, dash etc. This could be achieved by pricing the loyalty point appropriately using a base fiat currency, and integrating with a cryptocurrency exchange. Programs where points don’t expire or those that offer cashbacks for points could use this to reduce liability.

In summary

A shared ledger of loyalty transactions implemented with the right governance in place for data sharing and protection can help businesses understand customers better, and provide relevant real-time offers that matter, while reducing operational costs. Implementing such a solution will not be easy, however, the technology exists. As in most cases, a first mover advantage exists for those businesses that are able to successfully implement these networks.

Can these benefits be realized by tweaking, automating and optimizing existing systems and infrastructure? Yes, they can, but adopting blockchain will bring about some standardization in interactions within the ecosystem and help prepare better for future use cases including cross-chain integration, as the technology evolves. The jury, however, is still out on the cost v/s benefit part, which can be looked at after the current implementations have run for a bit. From a disruption point of view, I don’t believe we are anywhere near that in the loyalty space.

Of course, at the end of it, programs that keep it simple and treat loyalty as an emotional relationship and not just a transaction are the ones that will succeed, blockchain or not.