Blockchain’s Potential Role in Multi-partner Loyalty

Michael Cohen

September 18, 2018

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If you ask the average person on the street about blockchain, they’ll probably say something about a cryptocurrency like Bitcoin, Ethereum or Ripple. And yes, cryptocurrency is highly visible, but it’s only one example of why industries of all kinds are excited by blockchain — the emerging technology’s potential ability to continuously collect, authenticate and store information in a distributed fashion.

For most of us, blockchain is an intimidating topic. Hundreds of trending stories tell us it’s important, but the subject is so complex and filled with technical jargon that it’s easier to avoid it than to learn about it.

To make matters more complicated, blockchain is only one type of a broader technology called distributed ledger technology (DLT). Many people confuse the two, but DLT is a term that broadly describes the dispersal and syncing of the same set of data across many parties at once, rather than with one central party.

Thankfully, you don’t need to be an expert or fluent in all the DLT or blockchain terminology to start investigating it. But retailers interested in loyalty programs should consider that DLT could have an impact on how you operate and interact with partners in the future. This article will help you start to understand that potential impact and point you toward what you may need to begin thinking about.

Blockchain 101

Before looking at blockchain and DLT’s implications for loyalty, let’s start with the big question: What is blockchain?

Think of it as a central worksheet of every transaction within a given system — for example, a record of every loyalty point earned or redeemed by the customers in your loyalty program. This worksheet is decentralized, meaning there are many copies stored across a number of computers. Every time a change is made to the worksheet, it’s approved and logged by every computer within the network, removing the need for a central ledger. This decentralization means that third parties interested in fraudulent activities would have to compromise many of the ledgers within the network rather than just one centralized computer network or server, potentially making blockchain more secure.

DLT’s Potential Impact on Loyalty

It’s still very much in a test-and-learn state, but DLT’s power of decentralization could potentially integrate into your existing loyalty program in the future. If that becomes possible, it could speed up your ability to onboard new partners and minimize the complexity of B2B interactions.

Right now, most loyalty programs are centralized, with the brand that runs the program controlling how the loyalty currency moves around the ecosystem. That brand decides which stores offer what rewards, tailors special offers to specific program members to incentivize purchases and sets the parameters for how everyone can redeem their points.

The introduction of DLT can change this, potentially giving greater autonomy to vendors and opening new models for how collaboration can occur.

In its simplest application, DLT could facilitate a points transaction registry with built-in business logic, often called “Chaincode” or “smart contracts,” that automates the rules for creating and modifying points transactions.

There’s also a lot of speculation that DLT could help prevent fraudulent transactions. This is because altering a distributed ledger would require compromising multiple — sometimes millions — of ledgers simultaneously. Also, all transaction records within the chain are immutable, meaning they can’t be changed after that fact. There’s good reason to speculate, but it’s still too early to consider DLT as a silver bullet for security.

Big Potential for Multi-partner Programs

For multi-partner or coalition programs or companies with multiple banners, recently acquired subsidiaries or highly independent franchisees, DLT has exciting potential to minimize the complexity of day-to-day back-end operations.

Today, program operators foster partnerships across a wide array of industries in order to strengthen their programs’ value proposition. Banks have several partners where the points they issue can be used or redeemed, hospitality brands work with complementary companies like airlines or car rental companies to offer greater value to customers, and supermarkets partner with gas stations to expand their point value. All these industries tie up significant resources reconciling separate sets of transaction records with their reward suppliers and conversion partners.

In theory, DLT smart contracts could enable the continuous authentication and addition of new transactions to the ledger instead of everything being handled by an accounting department at month’s end. They could also allow programs to encode the roles, permissions and rules directly into the system, giving all parties within the network the freedom to work comfortably and independently.

For example, a single ledger could set and manage the rules for how a grocer, delivery app and airline handle transactions within the airline’s points program. In real time, the ledger would dictate and manage how all parties issue points, who can see and write transactions and what types of promotions mechanics are and are not permitted.

Testing in the Real World

Some companies have already started to test DLT within their loyalty programs. One of the most prominent examples is American Express, which recently launched a pilot program with the online retailer Boxed to trial DLT’s ability to improve the efficiency and transparency of how the American Express Membership Rewards program integrates with B2B partners.

The American Express Rewards program trial makes use of the open-source system Hyperledger Fabric to use a private channel on its blockchain for Boxed to transfer information. If successful, American Express could potentially replicate this with other merchants. Within the channel, Boxed can use smart contracts that automatically fulfill rewards program offers and pass the anonymized information on the transaction to American Express using its private blockchain channel.

The hope is that in using DLT, American Express will be able to give merchants control over what offers they are making, as well as to customize their Membership Rewards structure and even assign bonuses to items at product or stock-keeping unit level.

As more companies begin to test and learn on DLT and blockchain, it will be helpful for retailers to keep an eye on how both are being applied to loyalty programs, and the impact of each trial. There are already early players like Loyyal, a Blockchain-as-a-Service, but the market has yet to see a program with a significant number of transactions or partnerships in production. Even so, it’s possible that significant progress in the technology means programs will be able to support that scale in the next year or two.

Blockchain is still emerging as a tool for loyalty programs, but the time to investigate — and in some cases to experiment with it — is now. It might not be time for your brand to start investing yet, but you should begin to ask yourself the big questions, like whether blockchain could improve the efficiency of your existing program and in what ways you can begin to test it.

For more information about blockchain’s potential implications for your loyalty program, please download our new report, “Linking Loyalty: Blockchain Principles and Loyalty Potential”, and reach out to Michael Cohen at Michael.cohen@zerogravitylabs.ca

Loyalty

blockchain

Multi-partner Programs

About the author

Michael Cohen

Michael Cohen

General Manager, Zero Gravity Labs

Michael Cohen (JD/MBA) is an intrapreneur and innovation leader. With over a decade in innovation based roles, Michael has a track record for intrapreneurship and product development that has seen him bring multiple successful products to market. With experience across multiple startups (including his own) & corporate innovation roles Michael works at the intersection between business strategy, disruptive technology and customer experience to develop innovative strategy and forward looking product.

As the General Manager at Zero Gravity Labs (ZGL) Michael is responsible for the business leadership of the Labs including everything from overarching strategy, team selection, office culture and branding through formal partnerships and relations with the ZGL Board of Directors.

Michael is a proven builder of high performing innovation teams and businesses through his Agile and team first approach. Michael is a regular author and conference speaker on the topics of innovation, intrapreneurship, developing an innovation culture and disruptive technology. Michael is also a mentor to multiple start-up companies and is a member of the Technology and Innovation Advisory with Sick Kids Hospital Foundation.

Blockchain’s Potential Role in Multi-partner Loyalty

Sep 18, 2018, 10:00 AM
If you ask the average person on the street about blockchain, they’ll probably say...
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If you ask the average person on the street about blockchain, they’ll probably say something about a cryptocurrency like Bitcoin, Ethereum or Ripple. And yes, cryptocurrency is highly visible, but it’s only one example of why industries of all kinds are excited by blockchain — the emerging technology’s potential ability to continuously collect, authenticate and store information in a distributed fashion.

For most of us, blockchain is an intimidating topic. Hundreds of trending stories tell us it’s important, but the subject is so complex and filled with technical jargon that it’s easier to avoid it than to learn about it.

To make matters more complicated, blockchain is only one type of a broader technology called distributed ledger technology (DLT). Many people confuse the two, but DLT is a term that broadly describes the dispersal and syncing of the same set of data across many parties at once, rather than with one central party.

Thankfully, you don’t need to be an expert or fluent in all the DLT or blockchain terminology to start investigating it. But retailers interested in loyalty programs should consider that DLT could have an impact on how you operate and interact with partners in the future. This article will help you start to understand that potential impact and point you toward what you may need to begin thinking about.

Blockchain 101

Before looking at blockchain and DLT’s implications for loyalty, let’s start with the big question: What is blockchain?

Think of it as a central worksheet of every transaction within a given system — for example, a record of every loyalty point earned or redeemed by the customers in your loyalty program. This worksheet is decentralized, meaning there are many copies stored across a number of computers. Every time a change is made to the worksheet, it’s approved and logged by every computer within the network, removing the need for a central ledger. This decentralization means that third parties interested in fraudulent activities would have to compromise many of the ledgers within the network rather than just one centralized computer network or server, potentially making blockchain more secure.

DLT’s Potential Impact on Loyalty

It’s still very much in a test-and-learn state, but DLT’s power of decentralization could potentially integrate into your existing loyalty program in the future. If that becomes possible, it could speed up your ability to onboard new partners and minimize the complexity of B2B interactions.

Right now, most loyalty programs are centralized, with the brand that runs the program controlling how the loyalty currency moves around the ecosystem. That brand decides which stores offer what rewards, tailors special offers to specific program members to incentivize purchases and sets the parameters for how everyone can redeem their points.

The introduction of DLT can change this, potentially giving greater autonomy to vendors and opening new models for how collaboration can occur.

In its simplest application, DLT could facilitate a points transaction registry with built-in business logic, often called “Chaincode” or “smart contracts,” that automates the rules for creating and modifying points transactions.

There’s also a lot of speculation that DLT could help prevent fraudulent transactions. This is because altering a distributed ledger would require compromising multiple — sometimes millions — of ledgers simultaneously. Also, all transaction records within the chain are immutable, meaning they can’t be changed after that fact. There’s good reason to speculate, but it’s still too early to consider DLT as a silver bullet for security.

Big Potential for Multi-partner Programs

For multi-partner or coalition programs or companies with multiple banners, recently acquired subsidiaries or highly independent franchisees, DLT has exciting potential to minimize the complexity of day-to-day back-end operations.

Today, program operators foster partnerships across a wide array of industries in order to strengthen their programs’ value proposition. Banks have several partners where the points they issue can be used or redeemed, hospitality brands work with complementary companies like airlines or car rental companies to offer greater value to customers, and supermarkets partner with gas stations to expand their point value. All these industries tie up significant resources reconciling separate sets of transaction records with their reward suppliers and conversion partners.

In theory, DLT smart contracts could enable the continuous authentication and addition of new transactions to the ledger instead of everything being handled by an accounting department at month’s end. They could also allow programs to encode the roles, permissions and rules directly into the system, giving all parties within the network the freedom to work comfortably and independently.

For example, a single ledger could set and manage the rules for how a grocer, delivery app and airline handle transactions within the airline’s points program. In real time, the ledger would dictate and manage how all parties issue points, who can see and write transactions and what types of promotions mechanics are and are not permitted.

Testing in the Real World

Some companies have already started to test DLT within their loyalty programs. One of the most prominent examples is American Express, which recently launched a pilot program with the online retailer Boxed to trial DLT’s ability to improve the efficiency and transparency of how the American Express Membership Rewards program integrates with B2B partners.

The American Express Rewards program trial makes use of the open-source system Hyperledger Fabric to use a private channel on its blockchain for Boxed to transfer information. If successful, American Express could potentially replicate this with other merchants. Within the channel, Boxed can use smart contracts that automatically fulfill rewards program offers and pass the anonymized information on the transaction to American Express using its private blockchain channel.

The hope is that in using DLT, American Express will be able to give merchants control over what offers they are making, as well as to customize their Membership Rewards structure and even assign bonuses to items at product or stock-keeping unit level.

As more companies begin to test and learn on DLT and blockchain, it will be helpful for retailers to keep an eye on how both are being applied to loyalty programs, and the impact of each trial. There are already early players like Loyyal, a Blockchain-as-a-Service, but the market has yet to see a program with a significant number of transactions or partnerships in production. Even so, it’s possible that significant progress in the technology means programs will be able to support that scale in the next year or two.

Blockchain is still emerging as a tool for loyalty programs, but the time to investigate — and in some cases to experiment with it — is now. It might not be time for your brand to start investing yet, but you should begin to ask yourself the big questions, like whether blockchain could improve the efficiency of your existing program and in what ways you can begin to test it.

For more information about blockchain’s potential implications for your loyalty program, please download our new report, “Linking Loyalty: Blockchain Principles and Loyalty Potential”, and reach out to Michael Cohen at Michael.cohen@zerogravitylabs.ca
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