Are non-fungible tokens the Renaissance of loyalty programs?
In the 14th Century, the Renaissance started as an artistic movement with deep scientific, political, economic, and philosophical repercussions spanning through the 17th Century. In 2021, Non-Fungible Tokens (NFTs) spurred a digital ‘Renaissance,’ which gave artists a new canvas to express themselves. Will this movement carry over to other industries such as the financial services industry?
In layman’s terms, an NFT is a unique digital asset living on a blockchain. It is defined by unique attributes in the form of code and metadata. NFT use cases are not only limited to digital and real-world art representation but can also cover identification, property rights, and securitization, among others. Nevertheless, few NFT use cases involve bank loyalty programs today.
In this blog post, we explore why banks should leverage NFTs to build closer relationships with their customers.
Why should NFTs be an integral part of your business strategy?
For the first quarter of 2022 non-fungible token (NFT) trading volume was up 200% year-on-year following a 21,000% increase in 2021. This suggests that NFT projects — such as CryptoPunks — are entering the mainstream.[1] Furthermore, corporations such as Adidas and Visa are engaging with and supporting the NFT community.[2] As irrational exuberance slowly left the market in the first half of 2022, banks should start exploring this new technology to build lasting use cases and engage their clients more actively.
Banks have used points and miles systems to build customer loyalty, create brand awareness, and facilitate customer segmentation. These products have empowered banks to maintain privileged relationships with their most profitable clients. NFTs go further, by enabling their issuers and creators to build exclusive communities, which can nicely complement credit card products.
Digital collectibles complement existing loyalty programs. They create deeper relationships between the customer and the brand as clients can own a rare digital asset closely tied to the bank. In addition, NFTs nicely enhance personalisation initiatives as they can be designed to suit individual client preferences. For example, a digital art piece with post-Impressionist inspirations may be issued to an avid Van Gogh collector while offering Burberry-branded in-game accessories to a client with a deep passion for clothing.
NFTs offer new ways to reward customers for their sound saving and borrowing practices. They also allow banks to create unique, exciting digital experiences. Additional advantages of NFTs include traceability, managed transparency, and security. Each digital asset is easily traceable because it is tied to an owner on-chain. Transparency fosters trust as blockchains offer a common ledger for all participants to verify transactions and ownership information. Nevertheless, total transparency may not always be desirable. Banks should therefore carefully consider their readiness for public versus permissioned blockchains. Finally, the underlying consensus and technology maturity are key determinants of blockchain security and should not be overlooked.
How can you use NFTs in your loyalty program?
First, define your NFT strategy. This means clarifying the objectives, target audience, and distribution of the NFTs. Do you want to reward your existing customers by ‘airdropping’[3] them a rare digital token? Do you aim to expand your customer base to Web 3 digital natives and diversify your assets into crypto assets? Will you offer these NFTs to a small user base as a token of appreciation or sell them to a wider audience? Will your clients be able to sell their NFTs on a secondary marketplace or do you expect them to hold them in your digital vault?
Next, determine the customer benefits of holding the NFT instead of selling it, for example, will it give them access to unique airport lounges like certain credit cards today?
Will ‘super rare’ NFTs allow holders to attend exclusive wealth management conferences and offer your business new opportunities to cross-sell new products? Will they open the doors to private virtual rooms and social media groups of crypto enthusiasts?
Second, work with a crypto-native team to convert your strategy into code. You must plan your operations thoroughly and be ready to assist your customers on launch day. In parallel, your legal and accounting teams should consult legal and tax advisors specialising in digital assets. Finally, select the underlying Blockchain and smart contract language after you have a comprehensive strategy in place.
How will you build a close community around NFTs?
Building a strong NFT community will increase customer loyalty to your brand and has the potential to improve the customer experience by introducing a new way to reach clients online. It is therefore critical to engage your NFT holders constantly through professional and non-professional events. Some companies are also experimenting with gamification methodologies such as scavenger hunts and puzzles.
For instance, the VeeFriends collection, created by Gary Vaynerchuck, is an excellent example of providing lasting value with digital goods. A VeeFriend NFT includes a three-year pass to VeeCon, an exclusive conference for its holder.
While digital arts may have become saturated over the past few months, NFTs are ‘blue oceans’ for financial institutions. A small number of established institutions in the luxury industry have pioneered experiments in this emerging sector. Some have been successful and are renewing strategic collaborations with their communities.[4]
Nevertheless, very few financial institutions have decided to move forward with NFT initiatives. Visa notably stands out with its CryptoPunk purchase[5] and the launch of its NFT Creator Program. This is akin to an accelerator program for artists, musicians, fashion designers, and filmmakers who leverage NFTs in their businesses. It is also a testament to their support of the NFT industry. In this respect, it is reminiscent of how the Medici Family commissioned art pieces in Florence at the start of the Renaissance.
Will banks and other financial institutions step up and deploy capital to spur this new digital Renaissance? We will see. Tier-1 Financial institutions — such as Standard Chartered, HSBC, DBS, and J.P. Morgan — have already set up shop in the Metaverse. They all purchased land in the Sandbox, a leading decentralized game, to experiment with Web 3 and create new experiences for their customers. Offering NFTs to their clients could potentially boost their asset management and custody business with retail customers while still offering them the option to have complete ownership of the digital collectible in a non-custodial wallet.
Disclaimer: The content below is for informational purposes only and should not be construed as financial or legal advice. Consult your financial advisor and lawyer before making any material investment decision. The views expressed in this blog post are those of the author only and do not represent the opinions of GFT or its management.
References
[1] CNBC: https://www.cnbc.com/2021/02/25/nfts-why-digital-art-and-sports-collectibles-are-suddenly-so-popular.html
[2] Forbes: https://www.forbes.com/sites/robertfarrington/2021/12/25/why-big-brands-are-spending-millions-on-nfts/?sh=55c30beb6117
[3] Process of white-listing certain ETH addresses and giving them the right to claim digital goods.
[4]Burberry: https://www.burberryplc.com/en/news/brand/2022/burberry-x-blankos-block-party--new-nft-collection-and-social-sp.html
[5] CNBC: https://www.cnbc.com/2021/08/23/visa-buys-cryptopunk-nft-for-150000.html
