Is Blockchain Really The Right Approach For Your Loyalty Program? Perform a simple search on for the words What is ‘blockchain’ and ‘loyalty’ and you’re instantly pre- sented with over 5 million results. Skimming blockchain? through these results, the vast majority of the articles appear to take a common stance: the Traditionally, information that is being loyalty ecosystem today is built on archaic systems recorded and accesessed by computer and processes which need modernisation, and systems is stored in a centralized blockchain will be its saviour. I’m not necessarily database. Multiple client systems in a arguing with the first point, but I’m still not so sure network are all reading and writing to about the second point. Broadly speaking, most the same master copy of the data. This discussion about blockchain and loyalty today falls database is managed by a single into two main categories – Single program use centralized authority. As an example, case and Multiple program use case for block- think of many banking systems all chain. So, let’s take a look at both of them to try connecting to a single database that and unpack whether there is genuine potential for holds the master data about account blockchain disruption here. balances.

Clients

Database

Single Program Use Case for Blockchain

The first category is focused on using blockchain to allow a single program to reduce friction for its Blockchain is a decentralized approach customers and increase engagement. The grow- to handling data that removes the need ing number of unredeemed points continues to be for a trusted central authority to a headache for many programs. Whilst opinions manage a single database. There are vary on whether programs can tolerate the liability multiple copies of the database stored on their balance sheets or are in fact desperate to across the network, and every client is reduce it, everyone agrees that if customers are updating their local copy not redeeming points, then they are not getting independently. Various methods are any value from having those points – in other then used to assess which is the most words, the points aren’t actually making them ‘popular’ version of the database, and loyal. A common reason given for this is the lack this is replicated across the network to of meaningful redemption options for customers ensure that all the databases are – I’m sure practically everyone reading this identical belongs to at least one loyalty program in which they have some points, but not enough to redeem for an attractive reward. The blockchain advocates argue that if a loyalty program were to implement a blockchain solution, it would be easier to add other redemption

Page 2 of 6 Blockchain allows parties that do not partners (for example, hotels or online retailers) know or trust one another to make without adding complexity to the program. Fur- transactions. The technology involved thermore, the intrinsic characteristics of a block- allows the data to be transparent to chain would enable reduced transaction times, anyone in the network, and enables and greater visibility for consumers in terms of transactions to be authenticated and tracking transactions and managing their to be immutable. accounts. This is potentially interesting, but the vast majority of articles on the topic are very light on detail beyond such a high-level hypothesis.

Clients Database

The critical question to be asked in this first case is whether there is anything in this vision that actually requires a blockchain-based solution? A loyalty program today could overhaul its legacy IT infra- structure and use a centralised database architec- ture sitting beneath a layer of open APIs that oer a rich set of functionalities. A developer ecosys- tem could be encouraged to flourish in which third parties build apps that leverage these APIs, allow- ing partners to develop propositions for members of that loyalty program – and the program itself could leverage as much or as little control as it wanted over which partners were allowed access. The best known application of All of this is quite possible today with the right blockchain is for the digital intent and investment on the part of the program, bitcoin, which runs on a public (also without using a blockchain-based solution. It known as permission-less) blockchain would be a brave CTO who decided to invest network that anyone can be part of – wholesale in a relatively unproven blockchain either to make transactions or to solution over using proven technology compo- validate transactions. Other nents to assemble a solution that can deliver much applications of blockchain are private the same. (also known as permissioned) and are run by companies or groups of One of the other challenges with the use of block- companies for specific users only. chain by a single loyalty program is that the true There is ongoing debate within the value of blockchain comes in allowing multiple blockchain community about whether parties who have not established trust with one private blockchains mitigate what many other to make secure trusted transactions, and for see as the true benefit of the that ledger to be open and distributed and validat- technology – transparency and the lack ed by any party (ie. the miners). The classic exam- of a single authority controlling the ple, of course, being the open permission-less network. bitcoin blockchain.

Page 3 of 6 However, once a single corporate entity such as a loyalty How blockchain could program creates its own permissioned blockchain which it controls and for which it alone does the validation (ie. the help your program: mining), then the benefits of blockchain become less clear. At this stage, I find it hard to envision any large loyalty pro- gram investing wholeheartedly in moving its infrastructure onto a blockchain-based solution when the value proposi- Add new tion compared to existing proven technology remains di- redemption or cult to prove and quantify. Having said that, putting thoughts accrual partners of blockchain aside, I won’t argue with the fact that many of easily without today’s largest loyalty programs still need to make further increasing progress in delivering a seamless and engaging experience complexity for members that leverages the best of today’s proven tech- nology.

Greater visibility for The true value of blockchain members in comes in allowing multiple tracking transactions and managing parties who have not established accounts trust with one other to make secure trusted transactions

Interface with other, potentially competing, loyalty programs to allow fungibility of Multiple Program Use Case for Blockchain points

The second category of discussion around blockchain and loyalty tends to focus on increasing the fungibility of points. Typical proposals suggest using blockchain to enable multi- ple loyalty programs to connect with one another via some Leverage kind of exchange platform, thus enabling members of one blockchain to program to exchange their points into those of another pro- allow points to be gram. Alternative proposals suggest enabling loyalty pro- exchanged for grams that manage their infrastructure on blockchain to con- nect to established exchanges thus facilitat- (eg. bitcoin) ing the ability for members of programs to exchange their loyalty points for various cryptocurrencies, such as bitcoin or ether, or into proprietary tokens managed by those who intend to run such blockchain-based schemes.

Page 4 of 6 The critical question to be asked in this second case is not Questions to ask: whether this can be done using blockchain, but whether any loyalty program actually wants this? Most loyalty pro- grams are understandably wary of enabling their points to be turned into points from another, possibly competing, program. The aim of a loyalty program is to generate brand Could this loyalty and repeat – both of these aims are poten- be achieved by tially undermined if the members of your program are using modernising your your points to actually engage more deeply with another technology stack program, and not redeeming through your own channels. using current proven tools? Whilst some such exchanges do exist today, without being based on blockchain technology, their success is relatively modest, and the number of points exchanged via this chan- nel forms a very limited part of the participating programs’ overall points balances. Simply enabling such functionality on a blockchain-based platform isn’t going to necessarily change the fundamental business appeal, or lack thereof, to Is this a genuine the loyalty programs. challenge for you today? With respect to enabling members of loyalty programs to change their points into various cryptocurrencies, this is potentially interesting. On the one hand, it is essentially enabling members to cash out their points, something most loyalty programs avoid since, again, it promotes disengage- ment from the brand. On the other hand, given that crypto- can be viewed as an investment vehicle rather than simply as cash, there is scope for this being viewed as Whilst technically an attractive redemption channel. possible, is this a key component in your business strategy? Since, cryptocurrencies can be viewed as an investment vehicle rather than simply as cash, there is scope for Are your legal and changing points into cryptocurrencies regulatory teams being viewed as an attractive redemption comfortable with channel this?

The bigger challenge here is the reticence of most large corporate organisations, including large loyalty programs, to become involved in any way with cryptocurrencies due to the legal and regulato- ry uncertainty (often perceived but sometimes real) in this field in varying geographies. Furthermore, as with the population as a whole, only a small subset of a program’s member base is likely to want to engage with cryptocurrencies at this point in time.

Page 5 of 6 Conclusion: Too Soon to Invest in Blockchain

So, taking a step back and looking at the bigger picture, there is certainly scope in the future for block- chain to become a useful technology in the loyalty space, just as there is in many other industries. However, at this relatively early stage in the technology’s evolution, blockchain still feels like a solution looking for a problem – and this seems to be the case in the loyalty space.

For programs today, who face pressing issues around engagement, there are a host of solutions that work on today’s technology that should be considered. To cite just two examples into that direction, there are solutions that enable members of programs to use their points to buy bitcoin, or solutions that enable scalability without complexity by making it easy to allow members to earn or redeem points directly at online retailers.

The biggest challenge loyalty programs face today is not that they need to wait for technology solu- tions such as blockchain to mature and perhaps solve their problems in the coming years, but rather they need a stronger sense of intent and purpose to enhance their platforms using the best tools avail- able today – thus ensuring that they survive into the future. A future that may, or may not, one day include blockchain.

Dr. Akif Khan Head of PointsPay

Do you have questions around this topic or want to assess if blockchain is truly the right approach for your program, talk to us now: [email protected]

www.loylogic.com