The Paradox of Reward Points Meets Blockchain
85% of American millennials expressed dissatisfaction with reward programs, according to a 2015 study by Cap Gemini. The same study found that half of all U.S. consumers abandon their points and rewards programs annually. Meanwhile, 80% of all rewards points redemptions never happen among U.S. consumers according to a 2016 study by Deloitte. The reward point-bashing Millennials in the U.S. are expected to spend over $200B in 2017. The value of the points abandoned by this crowd is easily in the billions of dollars. Recently, we made this short cartoon video illustrating how our blockchain-based platform could reduce this abandonment.
Going on a lim, we’re going to suggest the following: the reward points ecosystem is broken. The reason may be that a simple paradox exists. Card companies, hotels and airlines (points providers), while they want to reward consumers for loyalty to obtain repeat customers, they also are driven by shareholders to gain as much profit from their consumers as possible. A reasonable person might assume that everyone cashing in on their loyalty points would mean losses for the companies.
Then there’s Korea, the seventh largest e-commerce market in the world. It’s a place where you can go into a department store and exchange your Hyundai credit card points for cold-hard cash. A place where I can save 10% on all my convenience store purchases because of a telecom membership. Rewards points engagement in Korea is pretty high, because there is a higher level of points fungibility. This is partially due to a limited number of chaebols, similar to conglomerates, that can make interesting alliances, still keeping the points and corresponding cash within their ecosystems when allowing for semi-freedom of points navigation. In regards to points, this really works for consumers. The variety of ways one can redeem different kinds of points is a major win. Furthermore, our team at Think Consortium has been working to take this a step forward with our Proof platform to bring these points to the blockchain, where they can be exchanged with other users, essentially turning points into digital currency.
Parts of this concept has been explored in Charles Ehredt’s TED talk in Barcelona a few months ago. Ehredt goes as far to suggest that these blockchain-points could be used in developing countries to dominate as a form of payment.
Imagine a world where consumers actually own their rewards points and can exchange them with other people for cryptocurrency like Bitcoin and Ethereum, as well as cash, in a completely decentralized fashion, not having to trust a third party. Points engagement among consumers would most likely explode; however, that would ram us back into the points paradox. Ouch, that hurt.
Loyalty rewards are meant to attain loyalty from consumers to remain within a certain family of products among partnered card companies, retail operations, hospitality chains, and/or travel companies. By making points fungible, users would earn points and then be able to leverage them elsewhere.
The following is story about how a blockchain-based points free market ecosystem could emerge and enhance consumer engagement and loyalty, as well as grow point providers’ bottom lines.
Meet Mary. Our hypothetical Mary earns air mile points by flying hypothetical Delta using her American Express-Delta reward credit card. Her 5,600 mile flight from San Fransisco to Seoul earns her 5,600 points, worth $56 in discount redemption on Delta’s online shop and ticketing site. Because these points are blockchain-based, she can log on to Proof and post her points for sale. Because she is participating in a free market where anyone can post their points for sale, her sale must be competitive. So, she lists the points, worth $20 at Delta store for $15 worth of Bitcoin. A user finds these point in the Proof marketplace and buys them with their Bitcoin. There is no third-party needed to complete this transaction. The settlement is the transaction. Go blockchain. The user who actually wants items from Delta’s website can purchase $20 worth of products and is essentially getting a 25% discount for their loyalty points.
Because of this blockchain revolution of points, let’s say there is now a 80% or more points engagement across the U.S. The billions of dollars that were not previously redeemed in 2016 is a thing of the past. Points are essentially always redeemed. Companies like Delta are now losing in sales margin. Poor companies. However, because American Airlines has their blockchain-based points program, Delta is remiss to lose customers to a competitor who would then gain in the loyalty market, diminishing Delta’s repeat customer potential. The companies must do something about this.
Enter a clever smart contract. This is a win for consumers and the loyalty point providers. These clever loyalty smart contracts issue points to users; however each point has a transfer fee, according to the contract that issued them. When one user moves a point from one address to another, 80% of the value is lost if its not a designated Delta partners address. Therefore, points are fungible but when transferred from the owner to another individual, they retain only about 20% of their value. Consumers are more remiss to transfer instead of use points; however, the freedom to convert their points to cash or other assets still exists. Freedom of transfer somwhat maintained. Ecosystem still broken, but we’ve made a little progress in engagement. Consumers demand change once on the blockchain with their points. Eventually, American Airlines makes their transfer fee 50%. Delta needs to compete, then lowers its transfer fee. The free market prevails and eventually, due to competition, gradually, only a small fee is charged for transferring points by most providers. During this transition, companies had a chance to adjust to a new ecosystem strategies and shift their models to form alliances… Korea style. In this scenario, the companies actually have items people want to redeem their points for. What’s more: these offerings are known and easily assessable to users.
In this scenario, points are giving consumers more value and adding dynamic ecosystems to synergetic point providers, earning them more revenue. Companies are getting rewards for enhancing customers experiences outside of their own product lines. The free market itself, leveraging a bit of blockchain magic, minimizes points wastage among consumers while simultaneously opening up multitudes of growth channels for corporations.
