How could loyalty programmes be transformed by the crypto world?
The idea that people who are customers of a retailer or another business-to-consumer (B2C) enterprise should be rewarded for their loyalty is not new. Founded in Michigan in 1896, the Sperry and Hutchinson (S&H) Company distributed stamps and stamp books to merchants. The merchants would then give S&H Green Stamps to customers to reward them for timely payment and/or for loyalty. When full, books of stamps could be redeemed by the customers for goods at designated outlets or from catalogues. Other retailers followed S&H’s example and launched their own loyalty programmes based on stamps.
Today, the number of people worldwide who have access to loyalty programmes can be numbered in the billions. The OECD club of (mostly) rich countries alone have a total population of about 1.3 billion. Many more live in populous countries such as China, India, Indonesia and Brazil. Loyalty programmes themselves have spread far beyond retailers; to airlines, hotel operators and many other businesses. Increasing and ever cheaper computer power has made them easier to establish and operate. In addition, they provide valuable commercial intelligence to the businesses that run them - such as details of who is buying what.
Loyalty programmes have flourished, even though normally there are significant constraints on the benefits that they confer on their members. Loyalty points may sometimes be transferred to other family members, but very rarely to other people. If the loyalty programme is run by a non-retailer, the points can usually only be redeemed for the goods or services that are provided by the business in question. Often there are restrictions on where and when they can be redeemed. Sometimes, the monetary value of the loyalty points to the member will be minimal.
It is sometimes quite difficult to quantify the monetary value of the loyalty points. Suppose you earn a lot of frequent flyer points with your preferred airline by flying around the world. Over the next year, you earn more frequent flyer points through a number of shorter distance flights. About 12 months later, you have just accumulated enough points for a return trip from your home city to X. However, at that time, cut-throat competition in the airline industry means that you can travel to X and back for far less than you could have imagined a year previously, but with another carrier. Do you redeem your frequent flyer points - which means that they are worth about the same as the new and low airfare to X and back? Alternatively, do you hold on to the points in the hope that you can redeem them for a journey that would otherwise be a lot more expensive than a return trip to X?
The loyalty that the business should generate from the programme will depend on the perceptions of the customers who receive the loyalty points. The customers’ loyalty is likely to be greater if they think that they are getting a really good deal from the loyalty programme. In the end, though, the customers have little direct input. The terms of the loyalty programme are set and controlled by the business.
Loyalty points have quite a lot in common with crypto-coins. They are bundles of rights that are passed by the issuer (the company running the programme) to the holder (the customer). They are not, and should never be considered as money. They only act as a medium of exchange to a limited extent (given the constraints listed above). They may act as a store of value, but are unlikely to do so over the long-term. They are never used as a unit of account.
Of course, loyalty points are not crypto-coins. The records of which loyalty points belong to whom are kept on centralised systems, which are operated by the company that is running the loyalty programme. The records are not held on blockchains - a series of decentralised ledgers which are updated simultaneously. Most importantly, loyalty points are not traded on any exchange. If you have more loyalty points than you want, there is no easy way of selling them to someone who is a willing buyer.
This could all change. For example, a retailer which based its loyalty programme on a crypto-coin that could be traded through a crypto-exchange by its customers would achieve a number of advantages, even if the loyalty crypto-coins could not be traded with non-customers. There would be much greater transparency in relation to the value of loyalty points. This would be true even if the customers were only able to trade the loyalty crypto-coins for other crypto-coins, and not directly for fiat currencies. Far fewer loyalty points would be wasted. The retailer would get valuable insights about which are the customers for whom the loyalty programme is most important: these would be the people who tended to buy large numbers of crypto-coins in order to redeem them.
There is no reason why the retailer in this example should limit the new programme to customers. It could be opened to non-customers, who would then redeem the loyalty crypto-coins with the retailer – and, in effect, become customers. The retailer could open the programme so that it is possible for the crypto-coins to be redeemed for goods and services (such as travel and accommodation) that the retailer would not normally sell. The greater the choices available to people, the more likely it will be that they will buy the loyalty crypto-coin. The greater the number of people in the community of buyers of the loyalty crypto-coin, the more likely it is that other suppliers of goods and services will become involved.