Crypto Will Thrive as it has Real-World Use Cases
Part 3: Loyalty Programmes
Continuing our series on the real-world use cases of cryptocurrencies, today I would like to highlight how customer loyalty programmes — a key tool in the arsenal of big businesses looking to retain their loyal customers — is being totally transformed by blockchain technology. What is important to us as investors is that the underlying blockchain protocol earns fees with every one of these loyalty programme transactions, accruing real and recurring value to the underlying network.
The Importance of Customer Loyalty programmes
Attracting and retaining customers have long been one of the major headaches for businesses all over the world. Companies use several ways to get these customers, and one such way is loyalty programmes. These programmes have been quite effective in retaining customers. But loyalty programmes today are not perfect. They have challenges, such as geographical limitations, limited reward options, complex redemptions, etc. All these issues affect the overall effectiveness of these programmes. But Web3 and blockchain technologies like cryptocurrencies and non-fungible tokens (NFTs) can solve these challenges and redefine loyalty programmes.
Loyalty programmes have proliferated across travel, retail, financial services, and other economic sectors. The average US household, for example, participates in some 29 different loyalty programmes, according to the biennial 2015 Colloquy Loyalty Census.
The result is a maze of point systems and redemption options, together with cumbersome processes for exchanging points among programme partners. Loyalty programmes are therefore ripe for innovation to make them easier to use. Today I would like to explain how blockchain technology is revolutionising these programmes both for customers and businesses.
The ongoing effort to win over customers is an inescapable aspect of a brand’s life and can often be a highly competitive business. Once a brand has established a good reputation, there comes the time to uphold it by providing consistently high-quality products or services. The aim is to gain and keep loyal customers who time and again choose your brand over others. In order to aid this process, brands implement numerous tools and methods, one of which is loyalty programmes.
The entire customer loyalty management market worldwide is valued at more than 5.5 billion U.S. dollars and it is expected to surpass 24 billion by the end of 2028, this represents a CAGR of 23.5 percent in this period.
Consumers appreciate ‘experience’ the most in loyalty programmes, while other most commonly cited ingredients of a positive experience with rewards programmes include ease of use and enjoyment, brand alignment, data usage and trust, good communications, and digital capabilities.
All in all, both businesses and consumers benefit from loyalty programmes if they are done right. Consumers appreciate instant wins, big prizes, and attractive discounts, which in turn drives sign-ups and encourages usage. Meanwhile, businesses reap the rewards of having a larger and more faithful customer base as well as a stronger brand connection and increased engagement.
Not all Loyalty Programmes are Created Equal!
In a more recent survey conducted among consumers in the United States gauging their use of loyalty programmes, it was found that in 2022, U.S. consumers belonged to 16.6 loyalty programs on average but actively used a little less than half of those. This emphasises that for a loyalty programme to enjoy usage by customers it has to provide real value and ease.
Web3 is Revolutionising Loyalty Programmes
Having customer loyalty programmes to maintain loyal customers is not something new. But a new trend has emerged: the use of the blockchain is helping to vastly improve loyalty programmes. Blockchain is considered to add value in three aspects: point treasury, point exchange operations, and rule-based intelligent contracts. What’s more, adopting blockchain is allowing companies to quickly add and maintain partnerships without adding complexity to their programmes.
Today, companies engaged in e-commerce, FCMG, banking, insurance, airlines, hotels, and others are already taking advantage of blockchain technology in their customer loyalty programmes.
Blockchain technology will also allow businesses to provide more options for points redemption for their customers. This could be a solution for today’s consumers who increasingly expect personalised journeys (not just segmented) and digitally enabled one-stop services.
However the application of this new technology to loyalty programmes is still in its developing stage, but looks very likely to lead to greater disruption globally as more and more large companies consider transforming their traditional loyalty programmes or building new ones through blockchain technology.
How Blockchain Adds Value to Loyalty Programmes
Let’s be honest here, most of us feel there are too many loyalty programmes, each with its way of earning points and how to use them. This can lead to frustrated customers and a lot of unused points.
Blockchain technology adds value to customer loyalty programmes in the following ways:
A safer experience for everyone
Unsurprisingly, security is a significant concern amongst customers. Brands can’t be cavalier about security with so much personal data involved.
Putting rewards based transactions on the blockchain ledger helps with security as they are cryptographically secured, immutable, and timestamped, increasing transparency and making everything traceable.
Therefore, blockchain allows customers to exchange tokens for rewards without compromising confidential data. Blockchain is also decentralised, so data is not in one location. Apart from keeping customer data safe, it can also help minimise errors and fraud through smart-based contracts.
Keep costs down
With blockchain’s ability to run programmes in real-time, companies can reduce administrative and personnel costs.
Opportunity to innovate
Adopting blockchain technology allows companies to improve their loyalty programmes by giving consumers more control, reducing mistakes, cutting costs, and thereby empowering their consumers.
How do Blockchain Based Loyalty Solutions Work?
Blockchain technology can be used to enable transactions in loyalty schemes (e.g., when loyalty tokens are issued, redeemed, or exchanged). Although creating a blockchain loyalty solution requires a significant investment, there are significant cost and other benefits. That is why we are already seeing a plethora of companies adopting the blockchain to run their loyalty programmes.
“Blockchain-based loyalty reward programmes should reduce system management costs with smart contracts capable of reporting secure, traceable, transparent transactions to legacy systems, reducing costs associated with errors and fraud” Deloitte.
Experiential loyalty
Integrating Web3 technology for loyalty programmes could also lead to innovations, such as experiential loyalty. Experiential loyalty is an immersive form of a loyalty programme that’s enabled with blockchain, where users don’t just get points but also get digital collectibles. It basically gamifies the experience. This can improve customer engagement with the brand by rewarding them in a new and more interesting way as a customer and making them a member of the brand community.
Each block on the blockchain is cryptographically chained to the next, creating a secure, virtually unhackable solution. Therefore, loyalty points can be stored on the blockchain, securely available anywhere which is a great benefit for the customer. Meanwhile, it dramatically reduces the cost of administration for the business.
From a customer perspective, although they may notice the benefits, they may not even be aware that a blockchain is powering this new loyalty system. Here’s a simple overview of how a blockchain based loyalty solution works from a customer perspective:
Rewards App
It contains an identity in the form of a digital signature, which stores value in a loyalty token.
Loyalty Token
At the initiation of a loyalty transaction (issuance, redemption, or exchange), the blockchain protocol creates a loyalty token generated by the algorithm, which is the basis for all types of rewards, including points. Then, the existence of loyalty tokens and unique identifiers are updated in each participant’s ledger and are available across the network.
Loyalty Network
Platforms can accommodate loyalty networks from various organisations and their loyalty programs, facilitating their interactions, especially in terms of conversion and point redemption.
The Blockchain-Enabled Future of Customer Loyalty Programmes
Blockchain-powered customer loyalty programmes are already starting to gain traction. The reason that big business is starting to use blockchains for loyalty programmes is simply because a secure and decentralised blockchain ledger actually solves customers’ problems with traditional rewards programmes, such as fraud, inflexibility, and clutter issues. So, it will not be surprising if in the next few years, more and more global companies and local companies see this as an opportunity to improve their loyalty schemes.
As blockchain enables a ledger of transactions to be shared across a network of participants, consumers get instant redemption and exchange for multiple loyalty point currencies on a single platform instead of juggling an array of disparate schemes. With only one “wallet” for points, consumers would not have to hunt up each programme’s options, limitations, and redemption rules.
The truth is that all loyalty programmes would benefit from a blockchain solution, with the travel industry perhaps the most likely to initially adopt this new technology. Travel loyalty programmes tend to be complex and multi-currency; programme points can even differ by trip component (flight, car rental, hotel, dining), leading to fragmented point collections and some points never being redeemed. It can be difficult for the average person to even accumulate enough points to earn a meaningful reward.
The Benefits of this Disruption for the Travel Sector
We have seen industry after industry experience disruption from technologies that reduce inefficiencies and frictions — often disintermediating established players in the process. Large travel companies, such as airlines and hotel chains, know this from experience: They pay billions of dollars in commissions each year to Priceline, Expedia, and other online travel agencies (OTAs) that have transformed how consumers book flights, hotels, and rental cars.
Now, both small start-ups and large-scale technology companies are looking to innovate around blockchain-based loyalty platforms. Travel companies with loyalty programmes, whether standalone or part of a larger alliance, will need to consider when, not if, to adopt blockchain.
Early adopters could benefit considerably. For example, a growing volume of unredeemed points has created a large balance-sheet liability for many industry players. (New accounting standards require that revenue attributable to the value of loyalty points must be deferred until the points are redeemed.) Adopting blockchain would enable companies to rapidly add and maintain loyalty partnerships without adding complexity to their programmes. By providing more redemption options, this robust, frictionless partner network would act as a much-needed release valve for these balance-sheet pressures.
Blockchain also would enable businesses to break out of the mould of narrowly defined, one-size-fits-all programmes and redemption processes filled with customer hassles. Consumers increasingly expect personalised (not merely segmented) travel offerings and digitally enabled one-stop services. 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.
Risks and Drawbacks
Of course, there are a few drawbacks to this change. These 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 fees. 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.
Getting in on the ground floor of blockchain platform development would help travel companies reduce these risks. Participating in the initial structuring of commercial agreements and partnerships will be essential to protecting critical loyalty programme components, i.e., currency value, customer data and relationships, and transaction costs.
What’s more, companies could seek to maintain exclusive control over their data, ensuring that only loyalty points enter the transaction stream. They could also require guarantees that the platform is and will remain unbiased. Otherwise, traditional travel intermediary tools, such as paid search placements and exclusive promotions, could force companies into pay-to-play arrangements to ensure competitors don’t gain an advantage.
In conclusion, travel companies such as airlines and hotel chains recognised too late the power of OTAs to disrupt the industry and have been paying for that misstep ever since. The nascent state of blockchain for loyalty programmes, however, offers an opportunity to realise the value of disruption and shape its future impacts — if travel companies don’t wait too long.
Examples of Companies Adopting Blockchain Loyalty Programmes
The importance of giving the best possible experience to these prized loyal customers is one reason why blockchain technology is being increasingly adopted for customer loyalty programmes. The hope is that the technology will revolutionise these programmes by eliminating some of the pain points.
There are many global companies that have started exploring the potential of this technology for their loyalty programmes. Here are a few examples:
Singapore airlines
In July 2018, Singapore Airlines announced that their frequent flyer programme, KrisFlyer, will now be converted to KrisPay, a miles-based digital wallet that members can use to convert miles into digital shopping with other merchants.
At the launch, KrisPay partnered with 18 merchants across categories ranging from beauty and food services to gas and retail. The press release announcing KrisPay described it as “the world’s first blockchain-based airline loyalty digital wallet.”
Chanticleer Holdings
Another pioneer in blockchain loyalty is Chanticleer Holdings, an investor in several burger restaurant chains, including BGR, Little Big Burger, and American Burger Co. In January 2018, they announced a collaboration with MobivityMind, a blockchain architecture platform.
As part of their new loyalty programme, customers who dine at one of their restaurants now receive a cryptocurrency called Mobivity Merit that can be exchanged across different brands and traded without any fraud issues.
“We love to see how consumers respond to getting real, transferable, and secure value in return for their loyalty to our brand.” Chanticleer Holdings CEO Michael D. Pruitt
American Express and Boxed
In May 2019, American Express announced a blockchain testing programme with online wholesale retailer Boxed. Using a blockchain framework, AmEx creates a private system for Boxed by transferring information that merchants on Boxed can use to fulfil rewards programme offerings.
When a consumer purchases at Boxed, the blockchain stores data about the transaction (while hiding confidential data about the cardholder). Transaction details trigger the creation of smart contracts, which create and award points in the backend loyalty system.
AirBaltic
Since 2014 AirBaltic has been accepting bitcoin for purchasing airline tickets. The company’s latest move is to issue another 10,000 NFTs associated with its loyalty programme.
The NFT ‘Planies’’ collection, launched in May 2022, is made up of 10,000 unique cartoon planes with different features on the design. The company sells Planies from a dedicated website, and it will also be used in the company’s advertising and featured in the onboard entertainment system.
Venmo
Venmo credit card customers can now convert their monthly cashback rewards to crypto. Venmo’s new “Cash Back to Crypto” feature will allow users to choose between bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH); the same four cryptocurrencies currently available on the Venmo app.
Once the transaction is complete, customers can store their crypto or sell it on the Venmo app. The programme will not support transfers to external wallets.
Shake Shack
Shake Shack is starting the cryptocurrency journey with a promotion that will reward some customers with Bitcoin.
Customers who purchase Shake Shack items using the Cash App with a debit Cash Card will get 15% cashback paid out in Bitcoins instead of dollars.
Loyal
Founded in 2014, offering a “blockchain as a service” loyalty platform for Hyperledger-based companies. This platform is designed to extend and enhance existing CRM and loyalty platforms. Loyyal already has significant airlines from the Middle East, Star Alliance, and Bond Brand Loyalty in its customer portfolio.
Starbucks
Starbucks Odyssey, the coffee chain’s new Web3 rewards platform built on Ethereum side chain network Polygon, is officially rolling out to the world. And the company says that demand for the platform so far has been “unprecedented.”
First announced in September following months of teases, Starbucks Odyssey builds upon the firm’s existing Starbucks Rewards initiative, but with a Web3 twist. Users can earn rewards points for buying food and drinks at stores, but also for participating in activities via the Odyssey mobile app, such as quizzes and other digital experiences.
Completing activities and amassing points then earns users “Journey Stamps” tokenized as NFT collectibles on Polygon. These stamps, which reflect the history of the 51-year-old coffee juggernaut, can be collected and eventually traded.
The stamps and points also collectively unlock access to potential exclusive experiences, such as online drink-making classes, events at Starbucks’ flagship Reserve Roastery locations, or even a trip to the company’s coffee farm in Costa Rica.
Final thoughts
Loyalty programmes are an important tool for big brands, and many consumers opt for certain brands because of these programmes. But they can definitely become more effective and easier to use, and blockchain technology is already showing how they can be made better. Unsurprisingly, many brands already recognise this and are taking advantage. Therefore, this real world use case for Crypto looks like it’ll continue to grow.
PTLIB is CIO of Dragonfly Asset Management.
DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
