The future of loyalty is blockchain

In recent weeks there has been much speculation in the area of crypto-currency with the price of Bitcoin hitting a high of around $20,000 before correcting 50% to the downside. These huge swings in various crypto-currencies detract from the underlying blockchain technology and it’s potential utility in a variety of business applications. Customer Loyalty is one such area where blockchain could revolutionise how loyalty schemes are administered and delivered to customers.

The problem with loyalty schemes

Loyalty schemes seem to have lost their way in recent years with significant marketing effort going into promoting them, in an attempt to persuade customers that they should be loyal to the loyalty scheme which is somewhat ironic. The problem with loyalty schemes is that they often provide little value for the occasional user and thus points go unused. Accounting standards require that these unused points must then remain on merchants balance sheet as a liability until the points expire or are redeemed. Despite this, loyalty and rewards programmes remain big business, requiring time and resources to manage and promote them. What advantages can blockchain bring to loyalty schemes to address some of the issues?

How would a blockchain loyalty scheme work?

The blockchain technology that lies behind the likes of Bitcoin and Ethereum, could be used to enable transactions within loyalty schemes (for example when a loyalty token is issued, redeemed or exchanged). Each digital transaction is recorded in the blockchain as an immutable record that is then available to other participants in the scheme in a decentralised ledger. All stored records are encrypted so that the data in those records can only be read by participants with the appropriate digital keys, but a cryptographic hash of each record is available for all blockchain nodes to read and verify. Each block in the blockchain is cryptographically chained to the next, creating a secure, almost un-hackable, solution. Loyalty points (represented by blockchain tokens) could therefore be stored in the blockchain which would be securely available anywhere without the need for a centralised database or scheme administration. This has major benefits in reducing the cost to administer the scheme but also making it highly available and immune from centralised outages.

Loyalty scheme vendors might choose to create their own crypto-tokens or participate in one of the growing number of universal loyalty scheme crypto-tokens. Either way, a blockchain based loyalty scheme offers numerous benefits over the existing approaches.

Marketing data

Scheme members can choose to make their data available to various organisations and earn additional rewards for doing so. The blockchain is immutable so all of a customers historical data is stored, potentially forever, making it a gold mine for marketing analysis. However, understandably customers can be protective over their data and will often tick the box that excludes them from sharing their data with third party agencies. By offering customers enhanced rewards and points for participating, more data will be made available and offers could be tailored individually.

Customer experience

Points from different schemes could be stored together in a customers online wallet in much the same way that different crypto-currencies are stored and traded now. This would simplify loyalty scheme management for the customer and possibly open up the opportunity for loyalty points to be traded through an online exchange.

Having the ability to trade points would benefit the consumer who may wish to trade a small number of points in one scheme for additional points in a scheme that he or she uses more frequently. For example, let’s say member A has 950 points in an airline loyalty scheme. Some of his points are due to expire but he wants to redeem them on a flight that requires 1000 points. Rather than paying the cash difference, he trades some of his supermarket points (which he rarely uses) to member B for 50 airline points. He can now redeem all of his points for the flight before they expire, while member B has a larger balance of supermarket points that he can either trade or redeem. This simplifies and reduces the fragmentation of different points schemes for members as they are able to utilise their points. It also creates a market for points where value is allocated based on supply and demand. Generous loyalty schemes would therefore command a higher premium than less generous ones. As a crypto-token, points could also be easily traded for other crypto-currencies such as Bitcoin or Ethereum.

For the scheme administrators, this means that points will be redeemed more frequently as members are more easily able to build up enough points to redeem rewards. This increases the marketing and brand value of the scheme and makes it more likely that members will use them.

The scheme member can easily maintain their account through the use of a plastic card or mobile app, where their public key (the key that allows points to be credited to their account) is imprinted and encoded onto their card or through the app. To redeem points the member would have to enter a password or multi-point authentication to authorise transfer of points (effectively accessing their private key) at the time of redemption.

For relatively small points balances consumers will likely leave their loyalty wallet in an online exchange where they are easily accessible, but for larger balances there is always the option for members to use offline wallets which will provide them with increased security. An offline wallet is really just a record of a users public and private keys giving them access to their account stored on the blockchain and enabling them to transfer funds.

Blockchain loyalty – emerging standards

There are already a number of crypto-coins that are specifically designed to work as loyalty schemes. Orioncoin.io and Incentloyalty.com are a couple of examples of loyalty token blockchains providing universal tokens that could be redeemed at multiple vendors.

Providing universal tokens might not be an ideal solution for every vendor looking to re-imagine their loyalty schemes. Building a proprietary solution using an one of the existing blockchain protocols might therefore be a preferable option.

The opportunity is now

Organisations administering loyalty programmes should be educating themselves and understanding how blockchain technology will impact their market share in the years to come. Blockchain might not be the panacea for ailing loyalty programmes but it is certainly creating some interest as a number of organisation look to blockchain technology to reinvent their loyalty programmes.

Richmond Innovation offers introductory courses in ‘blockchain for business’. These are non-technical courses aimed at providing attendees with foundational knowledge of blockchain, how it works and an understanding of the implications and opportunities. To find out more click on our training services page or reach out to us via the contact form with your requirements.

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