“Do you have our card? Not at all, or it’s just not with you right now?” Today it’s a familiar phrase from any dialog at any store checkout. And while the buyer is standing there, their card, as a rule, has long been resting somewhere home in one of the forsaken boxes next to all the other unused things. “Let’s check if it is tied to your phone number,” the seller happily exclaims. And usually, these attempts are not crowned with success. Because with today’s abundance of choices in clothes, food, and entertainment, users, having received another plastic card, are unlikely to “take care” of each retailer by registering separately, studying the terms of the loyalty program, calculating how much money 100 points are worth in this particular store, etc. DeCenter analyzed how blockchain rewards will help “bring loyalty programs back to life.”

Protecting User Interests

What do today’s loyalty programs do?

Modern loyalty programs are not only inconvenient in everyday use but also extremely unreliable. The conditions of the sales, which practically no one gets acquainted with, usually state that the company reserves the right to change the campaign’s conditions. Thus, having come to the store with a discount leaflet received during the past visit, users can find out that the particular sale has ended ahead of schedule, and everything that they have piled in their shopping carts under its guise is now sold at full price.

On his website, Vitalik Buterin tells about a similar situation, not in the world of retail, but in the world of computer games: “I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock’s Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring. I soon decided to quit.”

What does the blockchain do?

Blockchain reduces the power of companies that operate loyalty programs. When switching to the blockchain system, they will no longer be able to deduct points or randomly change their value.

Liquidity

What do today’s loyalty programs do?

The problem of liquidity, or rather, its absence, is one of the main issues of today’s loyalty programs. The campaigns of different brands are incompatible with one another, not to mention the fact that they are often poorly coordinated even within the same company. As a result, if you do not need accrued points from the restaurant (for example, you moved, and it took you too long to get to it), they will still be lying like dead weight on the same dead plastic card.

“Globally, $360 billion worth reward points go unredeemed each year!” writes Vijay Krishna, the founder of the Codemojo tokenized loyalty system. And according to a study conducted by the financial services center Deloitte, only half of the buyers take an active part in the bonus campaigns, and 20% of this half do not use bonuses. In a conversation with DeCenter, marketer Gleb Kashev gave an example of “self-burning” tokens that happened with the Raspberry bonus program when it went bankrupt. “Many customers did not have time to spend bonuses that had been accumulated over the years,” says Kashev. At the same time, such a system is unprofitable not only for buyers but also for businesses, since the unredeemed bonuses can be part of the company’s financial liability (in fact, lead to debt).

Referring to research by the analytic firm COLLOQUY, Deloitte notes that “involvement in loyalty programs in various areas in the United States increased by more than 20% to $3.32 billion in 2015, from $2.65 billion just three years earlier … and more than tripled from the beginning century.” At the same time, as the analysts say, despite the obvious growth, such campaigns still suffer from a lack of effectiveness. “There are several reasons for this, but first and foremost is we believe the paucity of uniform management systems is a primary source of members’ lack of activity,” the Deloitte study says.

Summary of statistics on traditional loyalty programs. Source.

“This centralization of points drastically limits their value and practicality. In fact, rewards not being valuable enough is the top reason why Millennials stop using loyalty programs. Even if you have amassed $50 worth of points with one retailer, the actual monetary value is not actually $50 when you consider the limitations placed on how, where and even when you can spend your points,” writes marketing specialist Aaron Wiseman.

What does the blockchain do?

Blockchain can completely solve the problem of liquidity, making tokenized loyalty programs of different retailers, brands, and networks in any area interoperable. So, if one broke up with a girl and no longer needs points from a jewelry store, they can exchange them for points at a liquor store or strip club the same evening.

“Bonuses in tokenized form are easy to exchange and spend in other services. I bought a radish in the store, got +10 bonus tokens, and then I spent this cashback on new wheels for my car. Convenient, simple, and no need to use crutches in the form of some bank cards. Costs will decrease, and marketers will appreciate new opportunities for co-branding,” says Gleb Kashev.

In addition to the smooth exchange between different tokens, the blockchain can allow a withdrawal to fiat, which is entirely unthinkable with new bonus programs. As for blockchain projects, such functionality will be supported by Minter. In it, users can exchange reward tokens both for tokens of other retailers and for stablecoins to preserve their real dollar value, and then convert them to fiat through the internal stablecoin of the platform, which provides unprecedented freedom to users.

Privacy

What do today’s loyalty programs do?

Modern loyalty programs collect a lot of user information, in fact, with the full permission of the user. Another thing is that when agreeing with the Terms and Conditions, almost no one reads them, entrusting their personal data and financial information, in fact, to an arbitrary number of third parties, as demonstrated by the scandal with Facebook and Cambridge Analytica. “It must be borne in mind that by filling out questionnaires, you create the risk of leakage of personal data. I filled out a discount questionnaire, and then you wonder why they call you and say: ‘Investing in shares is profitable!’” says Gleb Kashev.

What does the blockchain do?

Blockchain also allows users to create an open, decentralized database while ensuring users’ complete control over personal information. For example, the Shopin decentralized shopping app ensures that customers can only open access to their purchases to selected stores, where they are regular customers. It is assumed that store employees will never see the purchase history of a particular user: instead, the AI ​​will analyze the purchases and compare them with the offers of various retailers.

KYC, which has become a mandatory procedure for transparent crypto projects, can also be fully compatible with the protection of personal information. Thus, in the summer, Telegram (presumably in preparation for the launch of its own blockchain platform, the TON) presented a “secure universal identifier,” the Telegram Passport service. “Virtual Passport” allows its owner to comply with the requirements of KYC/AML and acquire cryptocurrency without additional confirmation of identity at other sites. At the same time, it is necessary to go through identification only once. The end-to-end encryption system will protect all personal data, and the decryption keys will be stored only by the users themselves. “Telegram does not have access to data stored in the Telegram Passport. When users share data, it is sent directly to the recipient,” says the official announcement of Telegram. The Sum & Substance KYC provider allows you to easily integrate Telegram Passport into blockchain and fintech projects. The Minter project was one of the first to implement this feature.

Security

What do today’s loyalty programs do?

The vulnerabilities of today’s loyalty programs from the side of security stem directly from their centralized nature, when all data is stored centrally with one operator corporation. Thus, when a database is hacked, all the sensitive user information stored there will flow into the hands of the intruders. “Starwood Preferred Guest, Marriott Rewards, and Ritz Carlton Rewards happily combined their loyalty programs into one in the middle of August, and after a couple of months, the data of 500 million users leaked to the network. The damage of the hacker attack has not yet been properly evaluated, but they are already saying that the data contains names, credit card numbers, passports, and even information about where and with whom people traveled. It is clear that the regulators will not leave this unanswered. The GDPR is already hoisted over the heads of everyone who does not respect cryptography. And with every such hacking event, the users will increasingly be sensitive to privacy and their data,” said Gleb Kashev in a conversation with DeCenter.

What does the blockchain do?

Blockchain provides a high level of security, making an attack on a large network economically unprofitable.

Expenses

What do today’s loyalty programs do?

Given the strict legislation on the use of personal data (in particular, the General Data Protection Regulation, GDPR, which came into force in May of this year), companies are forced to spend a significant portion of the budget on costly procedures to comply with personal information protection standards. Citing data from the Boston Consulting Group, the Financial Times, and Thomson Reuters, Cambridge Blockchain noted that “since the beginning of the financial crisis, the world’s largest banks paid fines worth more than $321 billion, and the total costs of compliance with regulatory requirements exceed $270 billion a year”; the costs of a large bank for a KYC procedure can reach $500 million per year.

What does the blockchain do?

As noted by the researchers of Deloitte, the blockchain for loyalty programs allows businesses to significantly save in three directions at once: in managing the system (thanks to smart contracts), transaction processing costs, and attracting customers. Therefore, a separate promising niche in the blockchain industry has become the development of identification solutions that are designed to ensure compliance with KYC and reduce associated costs simultaneously. “Business itself should be interested in implementing new solutions. Moreover, there are a lot of tools. Blockchain, in this case, would be useful here just to remove the possibility of cheating. And KYC providers will reduce the risk of data leakage and save companies and us from filling out annoying, often paper questionnaires that we exchange for plastic in a wallet. A win-win situation for all the players involved,” says Kashev.

Fraud and Abuse

What do today’s loyalty programs do?

With today’s loyalty programs, attackers can steal bonus points and even get access to pre-paid cards participating in a specific loyalty program. In 2017, bonus privilege theft accounted for 11% of all cases of account hacking, which is 7% higher than in 2016.

Another type of abuse of loyalty programs that is harmful to retailers (although not directly related to fraud) is hoarding. Deloitte’s blockchain for finance practice lead, Rich de Moll, says that the accumulators of points are not loyal. They spend points once and then move on to other loyalty programs with other retailers, which is not consistent with the objectives of a marketing strategy.

“Bonus programs and promotional codes are often ‘abused’ by users. Yes, I am sure that many of the readers themselves found loopholes, how to use the promotional code most favorably for themselves, and even several times. These are losses for companies and chances for lovers of free stuff,” as commented by Gleb Kashev.

What does the blockchain do?

“Because of how the distributed ledger works, it is replicated in such a way that it is very difficult to change. The more we remove control from a single enterprise, the more we eliminate various types of loyalty fraud,” says Brian Shniderman, principal and global payments practice lead at Deloitte Consulting LLP.

Blockchain also makes saving behavior less profitable, encouraging participants to spend smaller amounts of points, but more regularly. “Imagine this as micro-rewards that provide rewards in the behavioral situation you want to reinforce,” says Shniderman. Such a system of instant incentives and rewards (similar to the principles of dog training) best protects the interests of retailers. Real-time response is achieved, in particular, by eliminating bank intermediation, which in traditional loyalty systems can lead to delays in charges of several days. “With blockchain solutions, you can speed up the process by significantly reducing the number of unnecessary blockers in the ecosystem,” says Shniderman.

Who Is Leading the Way into the Future?

Opinions have been divided about who will become the leader in tokenized loyalty of the future: the traditional giants that will enter the blockchain or young startups immediately developing on decentralized platforms. Some think that retailers are too slow and too successful to have enough motivation to move to tokenization. “One of the most frequent questions that I get about Minter is ‘Who will use your coins? Who are your partners?’” says Minter founder Evgeny Gordeev. “People want to hear the names of big brands, the names of iconic people . . . Forgetting at the same time that most of the modern economy is already created by people and for people. In 1999, my friends and I wanted to do the first blogging platform, so we went to investors, looking for money. They asked us: ‘Who will write the posts? What stars will you attract?’ Our answer that millions of ordinary people will read the same ordinary people did not suit them, and nobody believed that it was interesting for someone to read an unknown person. History showed how wrong they were.”

Meanwhile, some large corporations are still entering the tokenized loyalty industry. Thus, the “Japanese Amazon” Rakuten reported on the transfer of its bonus program to the blockchain in February. Cathay Pacific and Singapore Airlines announced the launch of similar programs in May and July 2018, respectively. And as part of the EZ Rent-A-Car car rental loyalty program, users can exchange points for cryptocurrencies.

“The current reward systems for users and loyalty programs have problems that need to and can be solved with the help of cryptography and blockchain,” says Kashev. I think the story will be repeated as with coupon services. Even 5−8 years ago, they were around. Now there will be a second round, and then the corporations will buy services. In 5–10 years, any business will have the opportunity to tokenize its loyalty program. I think Minter can greatly contribute in this area.”