Are rewards points the best use case for blockchain technology (via Wiki commons).
Technology

Bringing smart contracts to consumer loyalty rewards programs

Blockchain-as-a-service provider Loyyal is betting distributed ledger technology can reduce costs and improve customer satisfaction

If you’re like most Americans, you are a member of about 15 customer loyalty programs, covering everything from that Starbucks app on your phone, to your airline frequent flyer points, to the rewards points credit card you use for all your purchases. And, of course, that free shipping and streaming video collection you get with your Amazon Prime membership.

There’s a pretty simple reason for that: you get something for nothing, or so it seems. The core idea of a loyalty program is that companies give you perks and special treatment in order to keep you coming back to them rather than the competition.

And there’s plenty of evidence that it works. Nearly 80% of consumers say they prefer to shop at those 15 brands, assuming they feel the program is a good value, according to the ninth annual version of “The Loyalty Report,” released earlier this year by Bond Brand Loyalty, a leading consumer loyalty firm. 

However, there is another benefit businesses get from loyalty programs: your personal data, ranging from what type of products you like to your spending habits. 

All that makes consumer loyalty a huge business. Between managing these customer relationships and paying for the reward points most programs use as a currency, companies around the world will shell out $126 billion this year, according to a survey of more than 1,200 program operators and nearly 5,000 program members released in May by LoyaltyOne, a loyalty program management company with more than 25 years in the industry.

Nearly three quarters of the companies LoyaltyOne surveyed are spending at least 2% of total revenues on consumer loyalty, and more than half are investing upwards of 4%. 

Taking off with blockchain

Consumer loyalty is also a business that Greg Simon, the founder and CEO of Loyyal, thinks is ripe for disruption by blockchain technology, and particularly smart contracts.

Focused on the back end of these programs, Loyyal’s blockchain-as-a-service platform “simply provide[s] the blockchain architecture for loyalty programs to run their programs better,” Simon told Modern Consensus. It is built on Hyperledger Fabric, an open-source, permissioned blockchain infrastructure, and the four-year-old firm does not—and will not—have a native token to sell, he said.

Greg Simon, founder and CEO of Loyyal.

Simon, a CPA, and former head of institutional equity sales for JP Morgan Japan, who was also managing director of Asian equities for Macquarie Securities, said that Loyyal’s platform is usable by any industry

However, the modern, points-based consumer loyalty program market started with American Airlines’ AAvantage program in 1981. So, Simon said, he felt the airline industry was a good place for them to start. 

Besides, the industry’s mileage rewards programs are huge, with American alone having about 100 million members, according to the highly regarded frequent flyer blogger Gary Leff’s View From the Wing

“[In] the loyalty industry, airline [points] are by far the most valued currencies, the most liquid currencies,” Simon said. “They’re effectively privately issued and managed currencies, issued by corporations as opposed to central banks. But the objective is the same.”

But he added, “they are horribly difficult to use. I know from firsthand experience—we all do. This is the reason [Bitcoin creator] Satoshi [Nakamoto] invented blockchain. This is literally the best use-case for it: making private currencies easier, faster, and cheaper channels.”

Emirates on board

Loyyal is currently testing a program with Emirates, the Dubai-based luxury airline. Like many large airlines, it has a great many partners who buy or accept its Skywards Miles loyalty points. One of those is a local ride-sharing service in Dubai, which accepts Skywards Miles as payment for rides, said Simon. 

“It’s the reconciliation aspect of it,” he said, adding that the larger airlines have hundreds of partners—Emirates has 120—earning or redeeming mileage points.

With the current technology, the ride-sharing firm will collect those miles and then send them in at the end of the month to redeem for fiat currency.

“They’ll send what’s called a batch file over to Emirates Airlines,” Simon notes. “Emirates will download that then reconcile the balance that they have versus the balance that [the ride sharing service] has.”

Multiply that by 120, and it’s quite complex, he said, noting that the process used to take 30 to 60 days to complete before customers were paid. 

“Now that they’ve replaced that with a Loyyal blockchain, instead of having to store and inventory the miles, [they are uploaded] to the blockchain in near real time,” Simon explained. “Emirates has access to that blockchain. What they learned in the pilot program is that by using Loyyal, as opposed to the previous reconciliation method, they were able to reduce that relationship cost by 80%. That’s quite significant.”

Smart contract-driven efficiency means partner programs—some of which were unprofitable but demanded by customers—will become more profitable, he added. “They can expand into more partners and you get this really great top line revenue growth by more partners, in addition to margin expansion.”

There’s another big economic benefit in getting people to use their miles. They are a huge liability. American Airlines alone had more than $8.5 billion worth of unredeemed airline miles on its books as of Q1 2019, according to its SEC filings. It deferred $963 million in revenue as a result. 

Refocus on the customer

The biggest benefit, of course, is keeping those customers happy so they keep coming back.

Another of Loyyal’s goals is to improve the customer experience and thus the actual loyalty of users. While both frequent and infrequent flyers often feel locked into an airline once they’ve built up miles, unused points start losing value to the holder, said Simon. 

It’s a big problem, as Bond Brand Loyalty’s research found that while American consumers average membership in 15 programs, they are active in fewer than seven.

That’s a particular issue in the airline industry, as the flying experience itself is generally unpleasant, with delays, overcrowding, shrinking seats, and nickel-and-dime upcharges common. And recently, the major airlines have been reworking programs to make it harder for occasional flyers to qualify for the coveted frequent flyer tiers that come with usable and highly valued perks like early boarding and free bags. 

Currently, only 42% of airline mileage program members are satisfied with their loyalty programs, according to Bond Brand Loyalty. As a result, airlines want to make those programs “more of an enjoyable experience for members,” said Simon . “I believe they sincerely want to make [customers feel] valued again. But, it’s a hard shift in mentality for them to do that.”

Greg Simon, founder of CEO of Loyyal, in a meeting.

The existing legacy program architecture makes it “a big hurdle for them to… meet the demands that consumers have,” he added. “Blockchain removes a lot of those obstacles.”

The hurdle, Simon explains, is that airlines began seeing their program partners—the companies like hotel chain and credit card issuers that used the miles as awards in their own programs—as the customers, rather than the actual flyers.

“At some point [airlines] started to look at the mileage program as more of a cash generation item… as opposed to a customer loyalty program,” he said. In 2018, consulting giant McKinsey noted that 58% of all the miles American distributed were sold to third parties.

And while unused miles diminish in value for flyers, they are a way for airlines to goose up their bottom lines. One of the big revenue streams was breakage, the term for unused miles that expire. It accounts for 15% to 30% of all airline miles, McKinsey said, adding that this is booked as profit. 

“It’s kind of counterintuitive to think that an airline will engineer [a loyalty program so that] a certain number of people do not value their brand enough to actually use the miles,” Simon said. “But, that improved the profitability of the program.”

Yet it’s changing as airlines come to view breakage as a lost opportunity to engage with customers, according to McKinsey.

“I think there’s been a shift in mentality in the industry over the last few years,” Simon agreed. “People … expect more fluidity and social connections and relationships with companies—particularly the Millennials.”

The profitable kind of KYC

“Know your customer” banking regulations may be the bane of many cryptocurrency exchanges but when it comes to loyalty marketing, knowing your customer can be a major profit center, Simon pointed out.

“One of the benefits of blockchain—why everybody likes it so much—is the inability to counterfeit token points,” he said. “That’s because each one has a unique identifier. And by exploiting that, you can trace the life of a reward [point] from when it was issued until it’s ultimately destroyed. Where was it earned? By whom? For what? Where did that person spend it? You can actually tag all that data to one specific reward. That gives you a lot of insight into the life of the reward, how are consumers earning and spending, and how they’re interacting with each other.”

By combining that consumer data preserved by the smart contracts built into Loyyal’s reward point tokens with artificial intelligence (AI) and deep data mining, they “can be much more efficient in determining what your lifestyle is and what you value,” said Simon. “It can be quite a complex step, bringing all this data together.”

Simon is betting that a blockchain-based solution can both automate the process and make it easier.

“That individualized service—currently reserved for VIP, ultra-elite customers—can now be automated in the smart contracts,” he said. “Everyone can have the same benefit. It’s like a personalized concierge.”

Loyalty program members do want special treatment not available to other customers, according to Forrester, which said that 80% expect this. While there is clearly an economic value to reducing liability and cutting costs, Simon’s main goal is to make loyalty program members feel valued, he said. 

When consumers believe a loyalty program is making an effort to make their lives better by knowing what rewards they value and guiding them towards them, “we can create that new relationship,” Simon said. “I believe consumers will say, ‘take all of my data because now I’m gaining from you having access to it,’ as opposed to … being bombarded to buy things that [they] don’t need.”

Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson owns no cryptocurrencies.