Tokens: The next evolution of loyalty points
By Edward W. Mandel
I’ve made the point repeatedly in my BQT blog that that there’s a difference between on-platform tokens and true cryptocurrencies. Cryptocurrencies — with the possible exception of bitcoin — are intentional media of exchange. (Bitcoin, in my opinion, might not have started out that way, but it has clearly ended up that way.) But then there are such coins as our own IOUX. While they might have a value that appreciates and depreciates relative to other assets — including other on-platform tokens, true cryptocurrencies and even fiat currencies — that is not what they’re actually for.
“On the IOU.io team we certainly want to get our IOUX tokens in the hands of those who stand to benefit from them most directly,” I wrote in this space in March. “[T]hese coins are intended to build a community around our revolutionary new concept in ecommerce. They express participation in loyalty programs, gateways into rating scales, admission into communication platforms and tickets into a new payment method that allows you to create your own tradable notes, bypassing both central banks and credit card companies — saving you money in the process, of course.”
Today I’d like to drill down into the first part of that use case: loyalty programs.
Loyalty’s limits
Loyalty programs are nothing new. Every airline, hotel chain and car rental company has them. So do most restaurant chains, and so do most retailers — whether online or brick-and-mortar.
And there’s long been a secondary market in loyalty points. I know a business traveler who, 20 years ago, traded his Hilton and Delta points for cash via some Web 1.0 exchange site. He got enough money out of the deal to put a down payment on a house.
But these offerings have generally been models of complexity and inconsistency. When it comes to processes that blockchain will disrupt, loyalty programs are among the lowest of low-hanging fruit.
“Ecommerce merchants have hundreds of potential technologies and techniques to encourage customer loyalty, but blockchain technology and blockchain-based crypto tokens offer unique advantages,” agrees SesameOpen cofounder Brandon Bidlack in a Practical Ecommerce article. “Many consumers have come to associate loyalty with points programs, such as from airlines, hotels, and credit cards. With these programs, the connection is clear between today’s purchase and future benefits. However, as much as 70 percent of consumers are reportedly not sure how many loyalty points they have with their favorite brand.”
How blockchain helps
Bidlack and I might be working the same side of the street, but sometimes you just have to acknowledge a direct competitor’s insights. This is one of those times. I really wish I’d have written this down first, but Bidlack’s article really encapsulates the two gaps between what ordinary loyalty programs promise and what it will take blockchain to deliver.
The first gap is in fungibility. Unlike loyalty points, tokens are more easily exchange-traded. This means customers can convert them to fiat currency, cryptocurrencies or other digital assets. Something like this is going on with in-game currencies. “Someone who has more Overwatch credits than they can spend can translate them into riot points in League of Legends,” I wrote on the BQT blog in April, “at which they suck but you wouldn’t know it by looking at all the stuff they bought with converted Overwatch currency.”
The other is program rules. A lot of companies seem to see loyalty as a one-way street. They want to keep sending out the message that the more you buy from them the more reasons they’ll give you to buy from them, but that’s not how it plays out in practice. Let’s say that a loyalty program has conditioned you to stay at a particular hotel chain. You earn about 2,000 points per night on average, and the conversion chart on the chain’s website says that you get a free night for every 30,000 points. So you proceed on the premise that, for every 15 nights you stay, you get a free night. But then you go to trade the points in. Suddenly you’re confronted with a sudden rule change: Between the time you started collecting points and your attempt to spend them, the price for a night went up to 35,000 points. And if you’re traveling over the summer, it’s 40,000. And if you’re traveling over the holidays, there’s a total blackout on anything but cash deals. And by the time you find a date when you have enough points and can actually use them, they’ve expired. According to Bidlack, there are “an estimated 48 trillion loyalty points unredeemed by consumers globally. Conversely, tokens are unrestricted, potentially reducing the redemption confusion.”
Bidlack concludes that the greatest barrier to switching from points to tokens is consumer perception. Customers might not like or trust loyalty programs, but at least they’re the devil they know. Tokens are still a very new thing, and it’s up to us in the blockchain-native ecommerce space to educate, familiarize, handhold and otherwise comfort consumers so that they come to recognize these benefits on both intellectual and visceral planes.
Securing the future
While I agree with all that Bidlack says, I’m not sure he’s gone far enough. Tokens have even more advantages over points as the loyalty rewards.
The most obvious is security. Distributed ledger technology is simply the best available toolkit for assuring that a customer’s public identity, personal information and financial data are kept in separate containers. I refer you to a recent New York Times article with the attention-grabbing headline, “Why Rewards for Loyal Spenders Are ‘a Honey Pot for Hackers’”.
“One loyalty-fraud prevention group estimates, conservatively, that $1 billion a year is lost to crime related to the programs,” reporter Tiffany Hsu writes. As a share of fraud not involving a physical payment card, such schemes more than doubled from 2017 to 2018, according to the Javelin Strategy & Research firm.”
She goes on to profile one poor sap whose 80,000 Hilton points ended up getting stolen by a hacker and spent on Amazon. She goes through a litany of loyalty program offerers — Starwood Hotels and Resorts Worldwide, Dunkin’ Donuts, McDonald’s, Buffalo Wild Wings — where loyalty programs turned out to be the corporation’s back door into customer data.
Just a matter of time
So maybe it’s the end of the line for legacy loyalty programs. As the Times reported, “Jaguar Land Rover, in a test, rewards drivers with cryptocurrency if they enable data-transmission technology in their cars.”
Jaguar is hardly alone. AirAsia is also heading that direction. Rakuten, the largest online retailer in Japan, could be the next domino to fall. It was an early and enthusiastic crypto adopter and once announced that it would launch its own cryptocurrency. Unfortunately, it made that announcement in March 2018, so it can’t be faulted with not following through. Clearly, Rakuten has an appetite for blockchain technology (it recently bought an exchange), and maybe a loyalty token — as opposed to a full-on cryptocurrency — would be a good move. That way they reap at least some of the benefits while allowing Facebook to make all the first-mover mistakes with Libra.
At least one ICO project, Tael, is looking to combine blockchain’s anticounterfeiting use case with its loyalty token use case via its WABI coin. On its website, Tael lists Rakuten as a partner, along with Nestle, Mitsubishi Financial and other major players. I wish the Tael team success.
Another sign of hope is Chipotle’s recent experiment with linking its loyalty program to spending via the Venmo payment platform. It’s a small leap from linking to a low-friction processor of fiat currency to an even lower-friction processor of crypto. If the executives at Binance, Coinbase and other centralized exchanges are smart — and my experience is that they are — they’ll zero in on this opportunity to broaden the adoption of spending crypto on low-value retail transactions.
IOU.io will be monitoring these developments closely and learning from these early movers as they discover the best ways to implement blockchain-based loyalty programs — as well as the not-the-best ways.
Edward W. Mandel is a strategic advisor for IOU.io, an Ernst and Young Entrepreneur of the Year finalist, blockchain enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful blockchain technology projects.
IOU is a blockchain-based peer-to-peer platform designed to unify ecommerce transaction and customer retention processes, incorporating tradeable IOUs.. The platform can be found online at IOU.io and its community on Telegram at https://t.me/IOUCommunity.