Attention Retailers: Blockchain Technology Will Disrupt the Loyalty Industry as You Know it

More than 75 percent of U.S. adults participate in customer loyalty programs, including those offered by credit card companies, hotel chains and retailers. However, over 50 percent of loyalty-accumulated rewards are never redeemed. This poses a problem for retailers and merchants, as loyalty programs now result in account inactivity and low redemption rates. Which begs the question: what can they do to fix this? The answer: blockchain technology-based systems. Blockchain, the underlying ledger technology for bitcoin, is beginning to make its way into several different industries outside of finance, including retail and loyalty programs.

Programs Need to Be Able to Integrate
Many consumers fail to use their rewards simply because the massive number of programs available confuse them or they're not easily accessible on their mobile devices. Ninety-four percent of customers indicated they would use mobile wallets more often if they could earn and redeem loyalty rewards through the platform. A blockchain-based loyalty platform is a perfect solution for those looking to integrate different programs into an interlinked loyalty network.

A blockchain-based loyalty platform provides a retailer with a common and open protocol, allowing a larger pool of developers to create and integrate their solutions. This not only allows for the creation of mobile loyalty wallets and payment solutions, but with the ability to support and integrate with all loyalty programs on the Blockchain network. Therefore, consumers get the option to pick and choose their preferred application for managing all of their loyalty points across several different merchants.

Benefits for Merchants and Third Parties
Now you might be wondering, what's wrong with simply using the current payment networks as the common interface for loyalty programs? While on the surface credit card networks can meet this need, it creates a problem as the retailer or merchant is dealing with an organization whose business is being an intermediary. For example, the credit card company will purchase rewards in bulk from a merchant to satisfy the demand, or the loyalty program provider will be purchasing a “last mile” service from a credit card company. This is a rather complicated and hard-to-scale solution that requires a manual process of interlinking individual loyalty programs and payment networks. This is why credit card companies will only partner with the most successful loyalty program providers.

A blockchain-based system becomes a remedy for this bottleneck as credit card companies and merchants aren’t required to know who they're integrating with because the system automatically supports any loyalty program on the blockchain network.

Making Loyalty Rewards Transferable
Using blockchain-based technology makes it easier to transfer and trade loyalty rewards within the blockchain network, without a central organization undertaking legal responsibilities as a middleman. The benefits and incentives this provides consumers are immense, including incentivizing them to use their points, via transferring, selling or exchanging them on open marketplaces for other loyalty tokens or fiat money. After all, 41 percent of consumers have redeemed points to give the rewards or benefits as gifts.

Performing these steps in a federated fashion, where multiple programs interlink with one another, has proven to be prohibitively difficult without the use of blockchains. Interlinked loyalty programs also provide a significant benefit to the merchant, as unused loyalty points are considered a liability on the company's balance sheet. Blockchain-based loyalty programs don't negate the ability of merchants to set constraints on their programs, such as expiration dates and limits to which other programs can be interlinked.

However, the success of blockchain in the loyalty space depends on whether enough merchants and retailers are willing to take the plunge and adapt to this emerging technology. Major retailers, like GameStop, Amazon.com and Costco, have begun integrating this technology into their business models. However, we've yet to see if this trend will catch on.

Will 2017 be the year of blockchain technology in the loyalty industry? Let’s wait and see.

Shidan Gouran is executive chairman of Chain of Points, creators of a groundbreaking blockchain-based platform incentivizing participation in loyalty programs.