Customers love reward points or redeemable loyalty points as they deliver great value to them. Companies maintain loyalty systems and give out reward points to understand customer behavior better and to keep them on board. Companies who have developed great loyalty programs have better customer following and market capitalization. Loyalty programs are industry agnostic – be it Retail, Banking, Consumer Goods, Travel, Hospitality, Telecom, Aviation or E-commerce. Research by Markets and Markets indicate that this market is expected to grow by 173% from 2016 to 2021 and touch $4.59 billion.
Shortcomings and ineffectiveness
Loyalty programs are meant to engage customers and bring more business out of it. However, building a loyalty program is expensive and not easy. Improper loyalty programs can lead to dissatisfaction amongst customers. Few reasons for this ineffectiveness are – poor integration of reward programs, inflexible reward structures & lack of visibility. According to a CrowdTwist report, 38% of brands express inability to measure the success of their loyalty management efforts.
The primary shortfall of current loyalty systems is that they are a closed loop, which means that the users can only trade value within those systems or redeem value via limited products offered. Imagine an open system for multiple providers where loyalty points could be easily exchanged across industries. It will be easy to accommodate any new merchant/provider into the system, making it a standardized solution in the market. After all, your airline or retailer, bank or card network’s loyalty program, at the core are all centrally managed ledgers.
Blockchain inspired program
Blockchain can help in developing a potential solution where an integrated yet open system of loyalty points management can be set up. A simple way to think about this is that blockchain would be the operating system and loyalty point management would be an application running on that operating system. Blockchain would add value in three aspects: points treasury, redemption operation and rule based smart contracts.
Loyalty programs are meant to engage the customers and bring more business out of it. However,building a loyalty program is expensive and not easy.
Future state program
Loyalty points from different companies and brands would be identified as different colored coins on loyalty management blockchain. The ‘colored coins’ concept is used to implement real world assets by setting up a ledger in blockchain. These colored coins or tokens assigned to a brand or company will be interchangeable as per the agreed exchange rates. This would make redemption operation much simpler. This integrated loyalty network would remove the transactional friction between the various siloed systems.
The loyalty engine is the core of the whole loyalty program. It calculates, updates and redeems the points. It applies rules on transactions in real time, converts into points and updates. These points-based treasury operations could be made autonomous with smart contracts. Smart contracts are self-executing contractual states stored on a blockchain, which nobody owns and everybody trusts. Smart contracts would relieve the loyalty program engine of the responsibility of operations, and authority remains with all the stakeholders involved.
Refer to Figure 1, points ledger is a distributed ledger with multiple user nodes and multiple tokens on a blockchain. This points ledger would be the single source of truth for managing the loyalty points. Merchants do not need to have separate databases and reconcile. The users have control over their points, although they pertain to a certain color (brand/company/ industry). Users can redeem the points conveniently via a single interface, rather than multiple loyalty platforms. Additionally, in such a system, users would be able to transfer points between themselves, which is not a feature of any loyalty program today.
Great value add
Blockchain, by its virtue brings value additions like making the transactions real-time. Hence, the loyalty platform becomes faster.
Blockchain-based points ledger makes it transparent, and thus reliable. Single points ledger removes the need to have captive ledgers by merchants, that makes the system lighter
Figure 2: Value addition to current loyalty reward management system
Significant benefits over current loyalty programs
One of the key aspects of this blockchain-based loyalty platform would be that it will allow users to participate in a transaction anonymously and still get the value as a participant/trader. Anonymity is maintained by the transaction encryption in the blockchain system. Treasury & redemption based on smart contract rules leaves no doubt from user’s perspective and brings incredible amount of user’s trust into the system. It provides convenience and a rich experience to the end users.
The greater value addition would be the open nature of the system for all the stakeholders – consumers, merchants, companies, loyalty program owners and system managers. This DLT (Distributed Ledger Technology) based solution cuts out the redundant operations and helps lower operating costs. Thus, the cost of maintenance of loyalty programs is reduced and eventually smaller merchants will also be able to afford them.
Approach and future
Building such a network will trigger major adoption in the industry. The PoC (Proof-of-Concept) is already made at Wipro using Hyperledger. Merchant systems & partner systems can easily and independently operate their own branded loyalty token by setting the conversion rate. This type of loyalty program would come at a fraction of the cost compared to traditional solutions.
As the world is gearing up for core ﬁnancial applications via blockchain, loyalty programs are less risky and ripe for blockchain implementation. Blockchain-based loyalty application can be scaled up gradually by including other companies. It would be a greater free-to-use multi-loyalty bazaar for everybody. Theoretically, with such a universal platform, loyalty points could become the second currency.
Prashant Kumar Singh - Distinguished Member of Technical Staff, Wipro
Prashant works as Technical Lead in blockchain CoE, Bangalore. He contributes in solutioning, consulting and client engagements. He has developed multiple blockchain use cases, POCs and POVs across domains. Overall, he has two years of experience in blockchain. He is also a trainer and does evangelization sessions on blockchain. Prashant has a strong academic background - gold medalist at IIT Kanpur MBA and engineering at NIT, Jalandhar.