Insights

Blockchain Will Transform Customer Loyalty Programs

Loyalty programs have proliferated across travel, retail, financial services, and other economic sectors. The average U.S. household participates in 29 different loyalty programs, according to the 2015 Colloquy Loyalty Census. The result is a maze of point systems and redemption options, with cumbersome processes for exchanging points among program partners. Loyalty programs are ripe for some kind of disruptive innovation that would make them easier to use.

Blockchain may just be the answer. Best known as the technology behind bitcoin, blockchain enables a ledger of transactions to be shared across a network of participants. When a new digital transaction occurs (for example, a loyalty point is issued, redeemed, or exchanged), a unique algorithm-generated token is created and assigned to that transaction. Tokens are grouped into blocks (for example, every 10 minutes) and distributed across the network, updating every ledger at once. New transaction blocks are validated and linked to older blocks, creating a strong, secure, and verifiable record of all transactions, without the need for intermediaries or centralized databases.

Blockchain may just be the answer.

For consumers juggling an array of loyalty programs, blockchain could provide instant redemption and exchange for multiple loyalty point currencies on a single platform. With only one “wallet” for points, consumers would not have to hunt for each program’s options, limitations, and redemption rules.

All loyalty programs are vulnerable to a blockchain revolution, but the travel industry is perhaps the most at risk. Travel loyalty programs tend to be complex and multicurrency, making them different from retailers, which typically run simple discount programs, or from banks, which offer cash back or a single currency that can be spent easily across a range of merchants. In some cases, travel loyalty program points differ by journey component (flight, car rental, hotel, dining), leading to fragmented point collections.  While estimates vary widely, we estimate that the typical “breakage” rate (meaning the share of points not redeemed) is about 10%–20%. Plus, it can be difficult for the average person to accumulate enough points to earn a meaningful reward.

The Benefits of Disruption

Many industries have experienced disruption, due to technologies that successfully reduced inefficiencies and frictions, often disintermediating established players in the process. Large travel companies, such as airlines and hotel chains, know this from painful experience: They pay billions of dollars in commissions each year to Priceline, Expedia, and other online travel agencies (OTAs), which have transformed how consumers book flights, hotels, and rental cars. Blockchain-based loyalty platforms could be another such disruption.

Both small startups and large-scale technology companies are eyeing the possibilities this presents, and some are teaming up. IBM, for example, is partnering with startup Loyyal to develop blockchain infrastructure for loyalty and rewards programs. Travel companies with loyalty programs, whether stand-alone or part of a larger alliance, will have to figure out how to respond.

Early adopters could benefit considerably. First, blockchain could help relieve a large balance-sheet liability that many in the industry are facing. Loyalty programs have long relied on cobranded cards and partnerships to sell points and generate incremental revenue. But the number of airline seats and hotel rooms available for redemption in recent years has been limited by near-record occupancy and load factors. The result has been a growing volume of unredeemed points, which new accounting standards have turned into a headache: Revenue attributable to the value of loyalty points must be deferred until the miles are redeemed.

Adopting blockchain would enable companies to rapidly add and maintain loyalty partnerships without adding complexity to their programs.

Adopting blockchain would enable companies to rapidly add and maintain loyalty partnerships without adding complexity to their programs. A robust, frictionless partner network could mean many more redemption options outside of the core travel product, thereby creating a much-needed release valve for these growing balance-sheet pressures.

Second, blockchain would enable businesses to break out of the loyalty program mold of narrowly defined, one-size-fits-all programs and redemption processes filled with customer hassles. Consumers increasingly expect personalized (not merely segmented) travel offerings and digitally enabled one-stop services; the growth of OTAs is in part a testament to that. Blockchain would allow both large and local partners to be added seamlessly, making the crafting of on-trend offers much easier, while virtually eliminating the back-end irritations of point redemption.

Caveats for Adoption

What shape are blockchain-based loyalty networks likely to take? Initially, each loyalty program might look to develop its own solution, but over time smaller loyalty programs might choose to band together to compete more effectively with larger ones. Ultimately, we expect to see the development of four to six blockchain-based loyalty networks, each anchored by a major airline, a major hotel chain, or a group of smaller travel companies. Options for building and maintaining the blockchain platform could include a joint venture with technology partners or with network providers such as banks or payment card processors.

Of course, the introduction of one or more blockchain platforms unifying multiple loyalty programs could pose a number of risks. Such platforms would add a transaction layer between consumers and program operators and merchants, likely generating a small per-transaction cost, which could grow over time, much like OTA fees. Customer data, a loyalty program’s most valuable asset, could become available to other network participants, even competitors. Currency devaluation is another risk in what is essentially an open marketplace for points trading.

To reduce these risks and avoid having their loyalty programs become commoditized, travel companies should get in on the ground floor of blockchain platform development.

To reduce these risks and avoid having their loyalty programs become commoditized, travel companies should get in on the ground floor of blockchain platform development. Participating in the initial structuring of commercial agreements and partnerships will be essential to protecting critical loyalty program components, including currency value, customer data and relationships, and transaction costs.

For any travel company considering an investment in blockchain, a few rules will be essential. First, they will want to participate in defining how currency is exchanged between programs — that is, how currency exchange rates are set, and any transferability rules. Second, they should seek to maintain exclusive control over their data, ensuring that only loyalty points, and not associated customer information, enter the transaction stream. Third, they should require guarantees that the platform is and will remain unbiased. Otherwise, traditional travel intermediary tools, such as paid search placements and exclusive promotions, could force companies into pay-to-play arrangements to ensure competitors don’t gain an advantage.

Travel companies, such as airlines and hotel chains, recognized too late the power of OTAs to disrupt the industry, and have been paying for that misstep ever since. The nascent state of blockchain for loyalty programs offers an opportunity to realize the value of disruption and shape its future impacts — if travel companies don’t wait too long.

This story first appeared in Harvard Business Review