Payments

The case for blockchain powered reward schemes

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As many people have discovered when finding a long neglected loyalty card gather dust at the bottom of a drawer, traditional loyalty schemes are struggling to remain relevant. The market is awash with loyalty programs to the point that they are on the decline. But while traditional methods may be stalling, the fundamental appeal of increasing loyalty and so increasing profits means that companies are on the lookout for new ways to re-ignite customer engagement.

Today, most loyalty programs are grappling with the same set of issues: they are costly, unengaging, and slow. An effective loyalty program needs to be balanced in order to create the right amount of customer retention. Too much loyalty, as well as not enough of it, has adverse effects on corporate cash flows when the rewards associated are over exploited to the point that the cost of maintaining the system outweighs the benefits of retaining the customer. On the other hand not enough loyalty means that the company will likely end up spending too much on an inefficient loyalty programme.

Another less obvious problem is that all rewards programs are closed systems: points earned through one cannot be transferred to another, creating an overcrowded and largely siloed ‘loyalty market’. This market is strongest in the US, where research shows that in the US consumers hold 3.3 billion memberships across different customer loyalty programs. This number translates to an average of 22 loyalty programs per household, according to Boston Consulting Group’s (BCG) research. Out of the 22, only 10 are actively used. Similar research in from Nielsen finds that UK consumers on average participate in an average 3.6 loylaty schemes per person. Yet despite greater enthusiasm for loyalty schemes compared to many companies, UK shoppers were unlikely to see them as a benefit. Only 51% of consumers surveyed said that “all other factors equal, I will buy from a retailer with a loyalty program over one without”.

Even in the instances where a loyalty program is actively engaged with and encouraged, it does not guarantee its profitability. BCG’s (Boston Consulting Group) research shows that even though some companies generate up to 60 percent of their revenues from loyal customers, this does not necessarily mean that the company is generating a higher profit. Combine this issue with customer side complaints like reward points having an expiration date, the traditional approach to loyalty schemes can be seen as unreliable at best, and a white elephant at worst.

This is why an increasing number of loyalty schemes are turning to new technologies like blockchain. Blockchain provides a myriad of advantages that can augment existing loyalty schemes, not least of which is reducing the need for maintenance. Smart contracts do not require the transaction to be checked or confirmed, and thus, less people are required to manage the program, freeing them up for other tasks such as better balancing the system.

A second advantage of the blockchain in these systems is a better consumer experience. All reward points can be kept on one crypto wallet, allowing the transfer or even fungibility of reward points. For the providers of the loyalty programs, things don’t change much, as they still set the rules on how to use the points and earn rewards, however the customer gets a seamless experience across loyalty programs. Moreover, with multiple loyalty programs being concentrated in one crypto wallet, consumers would no longer need to waste time at the till searching for the right loyalty card to use.

Simple quality of life improvements like this may help the customer journey, but the most obvious advantage from the developer side is the inherent security of the system, as every transaction is time-stamped and located in a distributed database, and thus cannot be changed. All transactions are traceable and the system – completely transparent. Thanks to these factors it is not only impossible to double-spend, but also to mirror a transaction along with any other fraud rendered impossible, meaning that costs related to customer service claims and fraud drop down considerably.

There are already successful examples out there showing how loyalty programs on the blockchain work. Online travel agent Trippki is collaborating with hotel groups worldwide on a blockchain-based reward platform. For every stay, guests get cryptocurrency rewards (TRIP tokens), that are added to their crypto wallet. Clients can then either use these tokens with partners or alternatively, exchange them for more popular cryptocurrencies. Hotels benefit from this, as they set their own rules of how many TRIP Tokens clients get for various periods of stay and other actions, e.g. writing a review. It also carries the advantage of smart contracts guaranteeing that the person leaving the review has actually stayed at the hotel, and thus had a genuine experience of the place.

Another good example of integrating blockchain into a loyalty program is the Canadian messenger Kik. The messenger has created its own cryptocurrency named “Kin” that is available to all users of the platform. Earning the tokens is made possible through simple tasks that contribute to the Kik community, such as leaving reviews or creating stickers. Like other in-app currencies, Kin can be bought for real money, but unlike them, Kin can also be sold or exchanged for goods and services inside Kik.

Energi Mine has been creating another version of a tokenised rewards scheme which financially incentivises to save energy. This is achieved with Energi Mine’s utility token, EnergiToken (ETK), which consumers earn for engaging in energy saving behaviour, from using low carbon transport or purchasing electric vehicles and energy efficient appliances, to reducing their employees energy consumption for behaviours as simple as turning computer monitors off at the end of the day. In turn, these tokens can be redeemed against consumers’ energy bills, used to pay for electric car charging, or even be exchanged for fiat currency.

By tokenising energy saving behaviour with real financial rewards, Energi Mine is able to incentivise consumers to make energy saving choices through subtle positive reinforcement, creating a feedback loop of consumers being able to earn tokens for green actions, and spend them on products or services that have further environmental benefits. The ‘loyalty’ in this instance is not so much to a brand, but to the very idea of saving energy.

It is still too early to say if blockchain technology will be integrated with the majority of existing loyalty programmes, or if companies will begin adopting it as a technology to build from. The unique benefits that tools like smart contracts and crypto wallets can provide the space will make blockchain technology appealing to companies struggling to balance the cost of loyalty schemes with the financial benefits it can bring. We’ve already seen blockchain projects democratise out-dated and non-inclusive areas like banking, insurance and lending. Applying principles of immutability, efficiency and transparency would go a long way towards breathing new life into the loyalty market.

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