Boosting Customer Loyalty Programmes (Blockchain for Gift Cards – Part I)

Untitled

Getting little bit into history, reward programs spans over a century (~120 years) with S&H Green Stamps in late 1800’s, the launch of modern programs by the airlines ~35 years ago, and to the recent coalition programs like Plenti’s initial marketing partners that include Macy’s, AT&T, Exxon Mobil and Rite Aid.

According to the 2017 Colloquy Loyalty Census, there are 3.8 billion individual loyalty memberships in the United States increasing from 2.6 billion in 2012. Every day we come across some sort of customer loyalty and reward programs in our daily lives while consuming products and services across industries that represent the spread of memberships in retail – 42%, travel & hospitality – 29%, financial – 17%, media & content, the cross-section of these industries and as well as others representing remaining 12%.

With that being said, loyalty and reward programs are facing the underpinning threats as well as bundled with few opportunities as described below. In view of this, Providers of loyalty programs should focus on their long-term sustenance and growth strategies. The following metrics are compiled from Kobie and Colloquy reports.

Threats:

  • Only 46% of loyalty memberships in the USA are active leaving behind more than half of all memberships inactive
  • Over 70% of consumers in the age group of 20 to 34 years old said they would change where they shopped to get more loyalty rewards

Opportunities:

  • 34% of USA consumer say they are loyal to a brand because of its loyalty program
  • Loyalty/reward programs with integrated sustainability, contribution to the environment and quality of life are scoring more than the rest

In the above context, Blockchain technology can play a significant role allowing the providers to integrate store locators, payment vehicles, loyalty programs, even games, in a platform that enables information always to be at the consumer’s fingertips. The blockchain based platform can offer convenience, rewards, ease of use and customer experience combine to build consumer loyalty, engagement, and advocacy.

Traditionally most rewards programs use a proprietary “points system”. Customers can accumulate points for purchases at a rate that was set by the issuer and finally uses the points to purchase merchandise at a redemption ratio set by the issuer which is somewhat regulated. 3rd party fulfillment usually handles the redemption hosting the user redemption via an online web framework, maintain and keep the catalog of rewards, administer point balances, manage promotions, ship rewards, and deduct the points in a systematic manner. As you can realize by now the multi-party loyalty systems are somewhat circumvented and that leads an opportunity for disintermediation. The recent developments with blockchain technology seemingly offers an effective alternative to run loyalty programs.

As depicted in the diagram above, the entire ecosystems of loyalty & rewards programs including providers, channel distributors, customers, incentives & payments firms can be seamlessly integrated onto a blockchain core to enhance the overall value proposition. Blockchain can enable a ledger of transactions to be shared across a network of participants. When a loyalty point is issued, redeemed, or exchanged, the blockchain’s AI algorithm-generated unique token could be created and assigned to that transaction and distributed across the loyalty network, updating every ledger simultaneously. Loyalty participants can validate the new transaction and link them to older transactions, creating a strong, secure, and verifiable record of all transactions, without the need for intermediaries or centralized databases. However, for security and privacy of loyalty programs, it may be logical to design a closed-loop rewards program, where only those parties involved in the loyalty program, issuers and merchants, would be allowed, which resembles a private or a permissioned blockchain.

If you can visualize, in loyalty platform backed by blockchain, the points associated with the rewards systems can be deposited by the issuer in a customer crypto wallet that would be available to immediately spend at any of the merchants that accept that cryptocurrency and participate in that closed blockchain. The issuer would no longer need to carry the liability for all unused points on its books, which is estimated at ~10% leakage of rewards that expire and can be written off with no redemption costs. To compensate this blockchain based systems can deliver cost savings in redemption by eliminating the third-party fulfillment function, along with the associated fees for those services. The cardholder would no longer need to log in to the fulfillment website to redeem points for merchandise or travel. Instead, the rewards currency could be used to purchase from any merchant, e-tailer, travel site or brick and mortar that accepts that rewards currency. Presumably, this would be a closed loop of possibilities, to avoid the problems that merchant consortiums such as Plenti had to deal with. Each merchant would then need to balance their prices, in the rewards cryptocurrency, in order to increase the potential for the cardholder to spend with them, but still maximize profitability. The inefficiencies arising from the issuer paying fees to a third party could be put back towards the issuer’s reward program, the payback for giving up the “breakage”. This, in turn, would allow the issuer to increase its rewards.

One would think now about how to handle a sporadic crypto price fluctuations? One way to address this is by keeping the rewards currency, not as a tradeable token on exchanges making the blockchain a permissioned network allowing only issuers who participate in the program, and merchants who are willing to redeem could be nodes keeping the expense and time delay of each transaction to reasonable costs and near-real-time. The participating nodes can be designed to perform a proof-of-cooperation calculation to maintain the integrity of the transaction.

To sum it up, leveraging customer loyalty blockchain platform,  the issuer no longer sets redemption ratios in the future-generation model of card rewards & redemption, removing any ambiguity as to what each reward point is worth. This allows merchants to price their goods at market rate to encourage purchase, removing hidden markups and resulting in loyalty truly becoming a currency.

Refer to Part II @

https://akshinthalakk.com/2018/06/30/enhancing-gift-crads-value-proposition-blockchain-for-gift-cards-part-ii/

 

Pragmatic Approaches to Blockchain Adoption

Adoption

As Blockchain Technology is gaining a broader acceptance, one of the lingering problem is on mainstream adoption of new technology. Blockchain as a technology can be used as an exchange network to complete transactions, move value and assets amongst peers on the network without the need for any 3rd party intermediary to validate or maintain these movements, and presumably at a lower underlying fees.

The core principles of blockchain sound great promising the blockchain technology’s viability across many fields with an opportunity to serve part of $3 Trillion global markets as follows,

  • Address part of global remittances which are of the magnitude of $444B annually (2017 world economic forum data),
  • Online/ecommerce payments of $2.1+ Trillion (based on latest data compilation from Invesp),
  • Global micro transactions of magnitude $500B+
  • Think of transactions of 2B+ unbanked people as per World Bank statistics.

While blockchain technology has potential in shaping the various markets and industries, let us dive deeper into finding pragmatic approach to adopting this new technology, key areas of concerns and evolving solutions in an attempt to sustain the innovative edge.

Blockchain adoption approaches:

The anomalies and contraries of public vis-à-vis private blockchain plays an important role in evaluating adoption approaches. The optimal adoption approach of blockchain depends on the nuances within the context of a company or group of companies or industries. The top two characteristics that drive the adoption is utility and speculation. While utility is to do with means of enabling transaction of buying or selling products and services, speculation comes from the investment eye of user/investor in terms of returns expected from adoption of technology. We drive deeper on these characteristics in determining the pragmatic approaches in adopting blockchains.  Refer to my blog page to brush up on basics of private vs public blockchain @ https://akshinthalakk.com/blockchain/

Public blockchain:

“Public Blockchain” offers an ability in maintaining both anonymity and transactional transparency. Most popular public blockchain like Bitcoin blockchain facilitates Monet-over-Internet-Protocol (MoIP) with progressive track record of use cases in B2B payments, remittances, online payments etc. Cryptocurrencies or “Coins” such as bitcoin are just value exchange applications built on top of blockchain technology. Cryptocurrencies were instrumental in demonstrating the power of blockchains and the many applications that blockchains will support and power. Due to technical limitations of Bitcoin blockchain like lack of coding Loops that limits proliferation of distributed applications on Bitcoin and complexities of UTXOx (Unspent Transaction Outputs) that makes implementation of smart contracts tougher, led to other popular public blockchains like Ethereum blockchain. Ethereum enables ease of creation of smart contracts and democratize application on top of underlying blockchain. Similarly the race for privacy has led to other public blockchains like Monero, ZCASH and DASH.  All the above public blockchains underpins both utility and speculation. Utility by virtue of completing transactions and moving assets paying premium for utility with localized cryptocurrencies bitcoin, ether, litecoin, monero etc. and drive speculation with sheer value appreciation of cryptocurrencies over time. Collectively there are close to 900 “Coins” are available to steer the public blockchain adoption by incentivizing the utility and as well as fueling the speculation.

“Blockchain Platform” is another means of driving the public blockchain momentum. Platform allows development of various applications (a.k.a dApps) serving numerous use cases. Any of the above public blockchains can offer Platforms for the development of dApps, but the technical limitations of Bitcoin as narrated above allowing Ethereum to drive the momentum of public blockchain adoption with robust community building applications on the Ethereum platform. Alongside Ethereum, there are a variety blockchain platforms came into brining decentralized ledger technology (DLT) one step closer to the reality. As per the Coinmarketcap.com data, there are more than a dozen blockchain platforms like Counterparty, NEM, NEO, Omni, Waves etc. exists today for the user and business to choose from based on their specific needs of privacy, security, scalability and gas requirements. When adopting to these Platforms, blockchain community got another flexibility in terms of “Tokens”. Tokens differ from cryptocurrencies.  Instead of developing application leveraging native cryptocurrency based public blockchain platforms, nonnative currencies known as tokens can be used to incentivize the utility of the Platform. Such tokens are EOS, TRON which are used as an alternative to “ether” currency on Ethereum platform. Collectively there are nearly 540 tokens available across 13 Platforms as of Jan 2018 that could potentially expedite the adoption of public blockchain. By embracing the full power of tokenization and platforms lead communities to deliver on the full promise of blockchain technology and ultimately, the allure of the public network.

Let us look at potential real life use cases of public blockchains. What if a vending machine that can monitor and report its own stock, and accept bids from distributors and make payments automatically via micro transactions for delivery of new SKUs? Bitcoin acceptance for online payments at many mainstream businesses such as Microsoft, Dell, OpenBazar and Overstock are few real life examples. This is how public blockchain may drive value convergence in future endeavors.

Private blockchain:

“Private Blockchain” becomes relevant if anonymity in transactions is not the top priority for companies or group of companies. Private blockchain can be secured by the familiar model of user rights and secrets that organizations are comfortable with over a longtime while still maintaining many kinds of partial guarantees of authenticity and decentralization that blockchains provide. Another use of private blockchain is for testing and experiment purposes. Private blockchain mainly focus on utility with or in most cases without any incentives and without aiding speculation as there need not to be an underlying “Coin or Token”.

Private blockchain can be started as a first step in blockchain adoption. Enterprises with a private blockchains start operating like distributed databases and notary services, often with very specialized objectives, such as tracking product origin and status. Private blockchain ca reduce transaction costs and data redundancies and replaces legacy systems, simplifying document handling and getting rid of semi manual compliance mechanisms. While private blockchain can be a useful start, but not a permanent solution as at maximum it offers hacker-proof database, where the software replaces a central bank as the intermediary of choice. Another downside is with write permissions being kept centralized to one organization and read permissions may be public or restricted to an arbitrary extent, the owner with a master key defeats the purpose of having a blockchain database in the first place. In a way private blockchain can be compared to an intranet with private LANs or WANs instead of using the public Internet and not leveraging full potential of blockchain technology. Private blockchains typically start with a single application and progressively extended to building interfaces across multiple applications and then extending to bigger ecosystem of cross-company landscape. That being said let us examine some private blockchain examples.

MultiChain is an off-the-shelf platform for the creation and deployment of private blockchains, either within or between organizations. It aims to overcome a key obstacle to the deployment of blockchain technology in the institutional financial sector, by providing the privacy and control required in an easy-to-use package. The other one is MONAX open platform private blockchains.

Federated Blockchains or Consortium Blockchains:

A mid path to public and private blockchain is a federated Blockchain that operate under the leadership of a group or Consortium. As opposed to public Blockchains, they don’t allow any person with access to the Internet to participate in the process of verifying transactions. Federated Blockchains are faster (higher scalability) and provide more transaction privacy. Consortium blockchains are mostly used in the banking sector. The consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants. Examples of consortium blockchains include, R3 for Banks, EWF from Energy, B3i for Insurance, Corda etc.

Vitalik Buterin, co-founder/creator of Ethereum said as follows on private/consortium blockchains:

“The consortium or company running a private blockchain can easily, if desired, change the rules of a blockchain, revert transactions, modify balances, etc. In some cases, e.g. national land registries, this functionality is necessary; there is no way a system would be allowed to exist where Dread Pirate Roberts can have legal ownership rights over a plainly visible piece of land, and so an attempt to create a government-uncontrollable land registry would in practice quickly devolve into one that is not recognized by the government itself….

Blockchain-as-a-Service (BaaS):

While blockchain adoption approaches of public vs private vs federated is an ongoing debate, leading technology providers has started offering blockchain as a service construct in setting up an environment to test and research blockchain adoption approaches leveraging their cloud offerings. Microsoft has partnered with ConsenSys to offer Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure. IBM(BueMix) has partnered with Hyperledger to offer BaaS to its customers. Amazon announced they would be offering the service in collaboration with the Digital Currency Group

In summary..

As enterprises mulls on pragmatic approaches to blockchain adoption, from the above description one can draw few primary approaches to blockchain adoption as described below.

  1. Jump start with ready-to-go public blockchains”. Start developing blockchain using the tools provided by the Ethereum, Bitcoin, Ripple etc. Serves the need of trust less, anonymous, transparent system with low transaction fees.
  2. Leverage ready-to-develop private blockchain platforms”. Get on to blockchain bandwagon leveraging open development tools of MultiChain and MONAX overcoming a key obstacle to the deployment of blockchain technology in the institutional financial sector, supply chain management, asset origination & servicing, claims management etc. by providing the privacy and control required in an easy-to-use package.
  3. Adopt industry specific consortiums in building blockchains”. Leverage the vertical solutions offered by industry specific consortiums like R3 for Banks, Clearmatics for building out financial market applications to streamline payments and clearing and settlement processes etc.
  4. Build-on-demand blockchains with BaaS”. Take advantage of as-a-service models of ConsenSys to try out various scenarios and use cases to evolve the right path of adoption of blockchain technology.