Branded Currencies Pt. 2 — The State of the Points Economy
Leveraging blockchain technology to enhance the points economy
Branded currencies are a unique asset category. Early iterations such as loyalty points, rewards, gift cards, coupons etc. have helped brands to influence and drive engagement, generate loyalty, and enhance the user experience. Similar to fiat currencies they serve as a store-of-value and a medium-of-exchange, however, they are only applicable to offerings from specific brands and merchants. This caveat imposes limitations on how branded currencies can be used, and has resulted in the significant accumulation of idle capital.
2017 Statistics:
- In the United States, outstanding points liability amounted to approximately $100 billion. An additional $50 billion is accumulated every year across Travel & Hospitality, Finance and Retail, 33% of which will go unused, never to be redeemed.
- In Canada, outstanding liability amounted to approximately $16 billion — an average of $629 per person. 25% of program participants said that they had never redeemed a point.
Lack of redemption negatively impacts both consumers and brands
Points represent value earned through completion of brand specified requirements, and are considered a form of corporate currency. Millions of users hold some form of points, resultant from an extensive amount of what we will refer to as consumer labour — the activities or “work completed” in order to earn points. Redemption difficulties and other program deficiencies such as changing rules and requirements negatively impact brand perception, and consumers have voiced their frustrations:
In addition to consumer dissatisfaction, brands experience a financial impact as a result of unused points. The monetary value of points equates to a promise of future services, as of 2018, the International Finance Report Standard (IFRS) and US GAAP required companies to report points as deferred revenue, and consider them a separate part of the sale — meaning unused points would show up as a liability on the balance sheet of the issuing firm.
More points going unredeemed increases the deferred revenue account balance, and reduces revenue firms can declare on their financial statements. This can impact investor confidence and company valuations. Under these standards, it is beneficial for companies to have consumers redeem more points.
Companies are able to eventually incorporate these unredeemed points into their revenue through breakage estimates — breakage refers to revenue gained by a retailer due to prepaid services that were never redeemed by customers. Companies can benefit from breakage in that it generates revenue without the provision of services, allowing revenues from gift cards and other prepaid services to be realized. In reference to loyalty points, payment is received in full — but is not considered revenue until the points are redeemed. Companies benefit from breakage in this regard as there is a monetary value attached to the goods/services that users ultimately redeem their points for, however, high breakage numbers can still impose a negative impact on firms:
- Loss of overspend revenue — In a study conducted by First Data in 2018, the average consumer spent $59 over the original value of their gift card, a $21 increase from a year ago. Lack of gift card redemption reduces the revenue companies can make from overspend.
- The program is ineffective — the program fails to drive/influence consumer behaviour, and breakage revenue does not justify the initiation and maintenance cost of the program.
- Loss of customer lifetime value — unsatisfied customers may disengage and eventually seek out other programs that serve them better. The company loses the future potential revenue from that customer and their social circle (if their negative experience influences others they interact with), as well the sunk cost of acquisition. In some cases, consumers completely disengage with programs due to difficulties or dissatisfaction:
What Causes Lack Of Redemption?
Issues faced by consumers:
- Programs exist in silos — they do not communicate with one another and cross-program value transfer is difficult to impossible, leaving consumers with assets applicable to offerings they do not want.
- Changing rules and requirements make the redemption process difficult and frustrating.
Consumers are unable to optimize their consumption due to an inability to transfer and trade points, leading to lower levels of satisfaction upon redemption, and ultimately points going unused. Additionally, changing rules and requirements, such as Air Miles proposed points expiry policy, make points redemption difficult. Consumers ultimately face a trade off, weighing the value of their points and what these points can be applied to, against the time and effort required for redemption. These barriers negatively impact the perceived value of points, and has resulted in excessive breakage within the loyalty industry.
However, despite high levels of breakage, 64% of consumers said that they would not consider applying for a card without an associated rewards program. Consumers enjoy participating in loyalty programs — they increase engagement with companies that offer good programs and build a deeper connection with the brand, thus improving customer acquisition, retention, and boosts revenue. The value created for brands is clear, however, it also suggests that value-added services are still important to consumers — even if they have difficulty reaping the benefits. Having is better than not having.
Issues faced by brands:
- Programs are subject to high initiation and maintenance costs, creating a high barrier to entry
- Underlying program infrastructure is not conducive to interoperability, making it difficult for programs to integrate.
Brands do not have access to cost-effective out-of-box solutions for their loyalty & rewards programs, making initiation, maintenance, and collaboration efforts difficult and costly.
Brand Response
Designed to show marketers what campaigns perform best, companies pay for their incentive to be available on Amazon, distributed as an Amazon credit. Consumers engage in certain activities specified by the brand, and are compensated with a flexible credit that can be applied to Amazon’s vast offerings.
Amazon Moments maintains the essence of a loyalty program in that it influences behaviour and increases engagement. Where it surpasses the existing points economy is in the flexibility afforded to consumers through Amazon’s massive product line.
Disney was one of the brands involved in the testing of Amazon Moments. After implementing the program, their profits increased by nearly seven times, which more than covered the cost of the Amazon credits distributed to users.
Triangle Rewards builds on Canadian Tire’s existing Canadian Tire Money program, allowing users to collect and redeem points faster, and spend their accumulated value at a larger number of stores, including: Sport Chek, Mark’s, Atmosphere, Hockey Experts etc. Like Amazon Moments, this program expands how consumers are able to spend their points, drawing them closer to the status of “digital cash.”
Starbucks “Stars” account for approximately 1⁄3 of purchases made, displaying an effective micro-economy based around Starbuck’s own currency.
Innovations such as Amazon Moments and Triangle Rewards have effectively increased the perceived value of points. By affording consumers increased choice, points feel more like cash, and helps to circumvent the most limiting factor in the points economy, the applicability to a specific brand or merchant. On the other hand, Starbuck has created an immersive micro-economy around its rewards program, with the active use of its inhouse currency (Stars) and payment method (Starbucks Rewards Card).
Is this enough?
Although these programs manage to benefit both brands and consumers, they fail to address the issues that ultimately limit growth and development. These innovations fail to provide infrastructure for plug-and-play solutions that will easily allow brands to integrate their programs.
DigitalBits — A Network Layer for the Points Economy
Imagine…
It’s 2022. You’ve popped into your local Starbucks for a cup of coffee. The barista rings you up and gives the appropriate balance. You open your DigitalBits mobile wallet, containing a number of branded currencies, none of which are Stars (Starbucks inhouse currency), and tap it to the scanner. You’re balance of Best Buy’s branded currency drops by the appropriate amount. Starbucks receives Stars for your purchase. You find a nice spot, take a sip of your coffee and crack open your book… imagine if value moved like that (for demonstration purposes only)
The DigitalBits blockchain allows for holistic program integration, and ready-to-go interoperability for on-chain assets. As a protocol layer blockchain designed to support branded currencies, DigitalBits is able to tokenize assets (points, currencies etc) from both new and existing programs. Tokenized assets are able to interact with little friction, allowing for easy cross-program value transfer, and addresses interoperability limitations present within existing program infrastructure. The multi-hop decentralized exchange implores a match-making service to support on-chain transfer and trading, enabling trades to be completed up to 6 intermediary hops. The DigitalBits blockchain will allow users to easily exchange their points for ones that apply to offerings they desire, optimizing their consumption and giving points a feeling closer to that of digital cash.
Blockchain technology can also help to mitigate the cost associated with initiating and maintaining programs, allowing a diverse set of programs to exist on the DigitalBits network. As trust in central banks and governments diminishes, the concept of assets backed and supported by brands has gained increased traction. Easily being able to launch an asset on-chain will not only allow brands at all levels to develop dynamic solutions, but introduces options for consumers and brands to choose from to best suit their needs.
Assets issued by smaller brands and shops will be able to interact with those launched by bigger names and vice-versa, prompting the creation of unique program offerings. As the ecosystem develops, brands may be able to optimize currencies they accept and use — which can lead to the formation of coalitions and alliances based on industry and use-case, i.e Retail sports stores may opt to accept currencies issued by athletics brands such as Nike and Adidas (for demonstration purposes only).
A Dynamic Value Economy
Advancements in mobile and digital technology have dramatically expanded the way we look at money. Value created through information and engagement can be better quantified and leveraged. This not only increases access to readily available capital, but allows brands and consumers to connect more dynamically than ever before.
