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Blockchain Technology Promises Major Benefits for Loyalty Rewards Programs

Last Updated September 29, 2020 11:16 AM
Lester Coleman
Last Updated September 29, 2020 11:16 AM

Loyalty reward programs have been growing rapidly for a long time, but they are not realizing full potential on account of customer account inactivity, time delays, low redemption rates, high transaction and system management costs, high customer acquisition costs and low client retention.

The Deloitte Center for Financial Services (DCFS), in a recent report , claims blockchain technology can improve customer loyalty and reward programs.

Enrollment in loyalty programs jumped 20 percent to $3.32 billion in 2015 from the prior three years. But according to one study, only 42% of those eligible for loyalty programs were active members in the U.S. in 2015. In addition, unclaimed rewards accounted for liabilities on company balance sheets. The 2016 Bond Loyalty Report indicated members who don’t redeem are 2.7 times more likely to join another program.

Programs Lack Uniformity

According to DCFS, the main reason for this inactivity is the lack of uniform management systems that confuse customers.

One solution is to integrate different programs into an interlinked loyalty network. Such collaboration is difficult given the industry’s inconsistent digital infrastructure and its need to protect proprietary information. Collaboration also requires using intermediaries that introduce the risk of leaking information and adding more costs.

In addition, a lack of adequate digitization prevents interlinking many programs. The lack of digitization is a main cause of programs’ lag times between points being made accessible in a way that allows customers opportunities to use them.

Customers Want Mobile Access

The 2016 Bond Loyalty Report indicated 57% of respondents were interested in engaging in loyalty programs using a mobile device, but 49% did not know if their programs offered this. The study claimed customers would be best off accessing multiple loyalty rewards programs on a single app such as a digital wallet, cutting the time lag further and improving the customer experience.

The Starbucks rewards app

Deloitte believes blockchain technology offers a new way to maintain and transact in a trustless, secure, interlinked network.

Blockchain allows loyalty rewards administrators, program providers, customers and system managers to interact with one another without intermediaries. This occurs without compromising competitiveness or privacy.

Blockchain Brings Benefits

Blockchain also has the potential to streamline administration and execution for program providers thanks to near real-time transparency. This delivers cost savings in the medium term.

For programs that have a competitive advantage through scale and already have some degree of interlinking networks, a blockchain-based network offers a viable trade-off since they can join the network on their own terms and control how their customers interact with their rewards programs.

For small operators, an interlinked network gives unprecedented scale.

Blockchain has proved it can deploy through digital wallets and social media, and can interact with existing loyalty rewards platforms via smart contracts. The blockchain can connect a largely disconnected realm of loyalty rewards programs, eliminate friction, reduce costs, bring redemption and crediting to near real time, and improve business relationships.

Blockchain will allow secure and immediate redemption, creation and exchange of loyalty reward points across vendors, programs and industries via a trustless environment by use of cryptographic proofs rather than third parties. An online protocol, programmed building blocks and smart contracts give blockchain technology the ability to act without intermediaries.

Three Key Elements

The blockchain solution’s key elements are a loyalty network platform, loyalty tokens and reward applications.

The platform can accommodate multiple organizations’ programs, enabling their interaction. It links them through all their agents that reach consensus about a transaction with no need for a clearinghouse.

The reward application, by means of a digital wallet, provides the point of entry to the network. The rewards applications have identities in the form of digital signatures that store value in the form of digital tokens.

The program provider can program its reward application to connect it to the loyalty network. The provider can program the rewards applications to preserve their competitiveness; they control how customers redeem and access rewards.

When a loyalty transaction is redeemed, exchanged or issued, the blockchain creates a loyalty token that serves as the basis for all types of rewards. Various protocols govern the way the points behind the tokens function.

Digital tokens can also distribute liabilities across participating merchants in the loyalty network, potentially reducing the liability of any one program owner.

A Facilitator, Not A Replacement

Despite the changes it promotes, blockchain is a system facilitator, not a replacement system. It interacts with legacy systems via smart contracts that send transaction records that are accessible to users that integrate them into their systems. The legacy systems continue to perform functions beyond what they need blockchain to improve on a transactional basis.

An existing loyalty rewards management system will still have sensitive customer information that does not exist on the blockchain.

Blockchain deployment does incur upfront expenses. But the cost savings will be identifiable on three levels – transaction, system management and customer acquisition.

A blockchain-based reward program should cut system management costs with smart contracts, including costs associated with fraud and errors. Program providers should be able to remove minimum points requirements for redeeming points, allowing for faster redemption transactions and cutting costs per transaction.

Blockchain could move millions of dollars of unused loyalty point liabilities from balance sheets since they exist in a shared network. Not all program providers want to achieve 100 percent redemption, however. And the shared reality blockchain creates for loyalty reward programs is not yet embraced by regulators who see rewards as liabilities on balance sheets until they are redeemed.

In addition to timing issues, loyalty rewards programs’ logistical shortcomings confine redemption of points to restricted vendor pools, further reducing consumers’ opportunities to use them. A blockchain-based network would make it easy to add and drop program partners and vendors.

Points Can Be Credited Faster

Loyalty reward programs are not credited to customer accounts in a timely manner for a number of reasons. In some cases, the rewards program provider has policies for authorizing points. In other cases, there are logistical reasons, like the lack of coordination among loyalty rewards programs issuer and a loyalty rewards program provider.

Blockchain can enable a transaction to record and be accessed by numerous parties in near real time, improving the chance the provider can credit points faster.

Blockchain-based loyalty programs are inherently difficult to hack, and also have the ability to provide security on numerous levels not previously possible. All points are tokenized, giving them unique identities that are hard to fake. Also, to access information recorded on the blockchain, it is necessary to hack more than 51% of the nodes.
Blockchain does not hold customer information, but records its transaction in a secure, irreversible manner.

Opportunities For All Size Players

Large providers with well-developed programs have unique opportunities to provide value-added rewards to other businesses. A small business for which a bank gives merchant banking will have access to the bank’s flexible loyalty rewards network. The bank can also provide the merchant the chance to join the interlinked network as a provider on the merchant’s terms through its own rewards app.

The merchant, which did not have a loyalty program with scale, will have the option to offer its clients loyalty points to be redeemed in a wider network. The bank adds a service to its small business client while the loyalty network gains another vendor to interact with other rewards programs.

Loyalty programs are a low-risk way for many businesses to test the efficacy and security of a distributed ledger solution since they are not core to those’ businesses’ operations, but are a value-added service.

Businesses Face Strategic Choices

Moving to a blockchain-based network from a legacy system requires strategic choices.

When a business decides to deploy an operating system based on a new technology, it must weigh the costs and benefits of “build versus buy.” Several technology players have threaded niche blockchain paths to particular types of business operations, especially in financial services, by creating distributed ledger platforms.

An optimal scenario is to leverage such expertise through a partnership. Providers can establish blockchain-based innovation labs with proof of concepts that cater to their employees. Or they can collaborate with other organizations with loyalty rewards programs to develop solutions that could become industry standards. The latter is the “consortium approach.”

Loyalty program service providers can base their platform on either a permissioned or non-permissioned distributed ledger. The non-permissioned blockchain is not a viable option in that it is open sourced and precludes the control that loyalty program providers would seek as rewards issuers. Within a permissioned blockchain, providers achieve openness and control depending on the trade-offs sought for scalability and cross-company and cross-industry participation.

The Omnichannel Factor

For blockchain-based loyalty programs to succeed, providers must establish an omnichannel presence. In addition to traditional channels like email and contact centers, providers have to consider mobile and social media channels.

The 2016 Bond Loyalty Report noted only 30% of respondents were satisfied with their program’s website experience, including its mobile view. Program providers must establish front-end capabilities to operate smoothly in these environments.

In a distributed ledger solution, all loyalty rewards program participating agents operate in a contiguous network without intermediaries and without undermining privacy. Blockchain can streamline execution, giving all parties near real-time transparency within the permissioned constraints of the program provider.

Loyalty rewards providers can control how they and their customers interact in the interlinked network to which blockchain provides access.

What the industry is waiting for to make this happen is critical mass. It is important to achieve buy-in by at least a handful of players that already have well-developed programs and scale. Second is to ensure that accepted standards are part of the process.

An attractive feature of loyalty rewards is that they are not core to a business’ operations, so a company will be more willing to join a consortium effort. A best-case scenario is that a facilitator builds a network on a solid protocol and gets enough buy-in to create standards for blockchain in the loyalty rewards space in general.