Crypto loyalty schemes: the new money

Thursday 12 May 2016

My view is that customer incentive schemes will prove one of the big use cases for crypto in the coming years - but not all agree.

There are many, many applications to distributed ledger technology. It’s likely we’ve barely scratched the surface. Although bitcoin kicked off the blockchain boom, most use cases probably won’t be about money. But that paradigm shift takes a while, and bitcoin has firmly established the possibility of value transfer over the blockchain. My view is that there are three major (and overlapping) use cases for this in the short term: remissions, tipping, and loyalty schemes.

Tokens

Crypto reward schemes will look more like private money than tokens businesses redeem for goods and services

Reward points

Loyalty schemes are nothing new. They’re familiar in the form of Frequent Flyer miles, Nectar points, Starbucks’ Stars… and literally thousands more. The idea is simple. Create a kind of private currency to distribute as a reward for purchases at a given store, thereby giving people a reason to return and spend it. Some schemes (like Nectar) allow you to use the same points at many different stores, leveraging the network effect of those businesses. Others (Starbucks) do not. But rarely if ever are tokens transferable. Secondary markets are not encouraged.

A vast market

Loyalty schemes are a huge market. A survey of 9,000 millennials shows that ‘16 percent of Australian millennials are managing loyalty/reward programs on their mobile device, however 46 percent would like to’. 94 percent use their smartphones in restaurants. This alone is a vast opportunity - and that’s before you even start to look at e-commerce. Now, what could crypto bring to that table? Transferable tokens, that have value beyond their use with specific merchants, thus functioning as a form of private money? Sounds pretty cool. But not everyone is convinced.

Anthony Lewis, Blockchain advisor to financial institutions, blogger at bitsonblocks.net, recently posted this article. He argues that blockchains don’t offer many advantages to businesses for loyalty schemes. He starts with a pretty thorough overview of the different types of loyalty scheme.

‘Businesses are the central bank of their loyalty points... the companies operating the schemes control the creation, destruction, distribution, and value of points. This is good for business and loss of any point of control would not be desired.’ Bottom line? Blockchains and loyalty schemes won’t be BFFs. ‘In summary, with transferability, although companies retain complete control over creation and destruction, they lose control over distribution and to a certain extent value of points.’

Fair point, but...

These are reasonable objections. Lose control of your points and you could be hit with a liability you weren’t expecting - welcome to the free market. But that assumes - amongst other things - the value of your points is pegged, or rather, that you as a business are backing them with some product or service. And that doesn’t entirely make sense.

Allowing transferability makes loyalty points more attractive to customers. It makes the points more valuable. I might never use points I receive - but I can send them to my wife, who will. So yes, companies that issue loyalty points will need to do some sums to reflect the new paradigm and increased utility (and liability) of the points they offer. They may need to adopt different terms of redemption. But the very fact that the points are more valuable to customers reflects that they are doing something right, not wrong.

Secondly, we’ll likely see a whole new type of loyalty and incentive plan arising around the crypto paradigm. It will be one in which customers receive a small reward for purchases - let’s say 1% of the purchase price - in the form of a crypto-loyalty token, sent to their smartphone. Effectively, that’s not a traditional loyalty point: it’s cashback.

Trading on the free market means this token is not the same as a regular reward. Its value will fluctuate according to supply and demand. That may upset or confuse some customers, though we’re talking about relatively small sums here. But it won’t upset merchants, because it’s actual money. When customers use it to pay, they are accepting another form of cash. There is no forward liability to issuing this kind of reward. You just accept it back at market price.

Surely that’s an attractive proposition for businesses?

Edit:

Since this article was published BitScan has launched a crowdfund for its loyalty token Incent. Find out more or take part in the ICO at https://incentloyalty.com/


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