Breaking loyalty silos

Loyalty programs of the 1980s and early 1990s offered quite limited options when it came to using your points (the brand’s loyalty currency ). The only meaningful way to spend these points was to exchange them for a reward from a catalog. Or maybe you could exchange them for a discount, as in the case of stamp-based programs. This was a natural approach at the time, as each brand treated its loyalty program as its own marketing tool. When deployed alongside other tools, the loyalty program should strengthen relations between the customer and the brand – and only that brand.

Increasing liquidity

But this was about to change. As the market became saturated with various loyalty schemes, from retail to telco, and programs grew in size and reach, the attractiveness of the basic loyalty proposition started deteriorating, to the point that customers began to view it as almost a commodity.

Brands began searching for ways to differentiate themselves, especially those that owned programs with strong, well-regarded loyalty currencies. One way to do this was to allow program members to earn and spend points outside the “home business” ecosystem, for example by using them for products or services offered by a partner company. Another was to let them exchange “home program” currency for another and vice versa (albeit at highly unfavorable rates).

Take for example Miles & More, which established itself as a well-recognized brand in the travel loyalty world. Launched in 1993 as Lufthansa’s frequent flyer program, it has steadily evolved into the largest FFP in Europe, helped by the company’s expanding association with Star Alliance. This program currently allows members to collect and spend miles across more than 40 airline partners and close to 300 non-airline partners. Moreover, the Miles & More program lets members convert its loyalty currency (in this case, miles), into other programs’ currencies and back.

Following in the footsteps of Lufthansa and other large loyalty program operators, the entire landscape has changed. Now, cross-program currency flows are part of a push to improve member experience and enhance engagement.

Technological advances

This evolution wouldn’t have been possible without some of the technological changes of recent years. One of the most important changes – the emergence of web services and API-based connectivity – created an interlinked ecosystem in which loyalty currencies can be exchanged and spent in a user-friendly way, and in nearly real-time. Another major outcome of these technological advances is the emergence of dedicated platforms that specialize in loyalty point exchange between programs (so-called points brokers), and even conversion to cash.

Points.com is one of the best-known loyalty point exchange platforms, letting members exchange points between different programs (although the majority of the revenue generated by Points.com comes from members buying points through the company’s third-party services).  Another example is PointsPay, which allows online shoppers to convert unused loyalty points from the banking and travel sectors into cash for purchases across a wide portfolio of online retailers.

Technological advance certainly had a major impact on the growing liquidity of currencies in the loyalty programs market. Now, though, another change is beginning; and this one might send shivers down the spine of some loyalty program operators.

Towards full liquidity

In June 2019, the tech world and millions of users around the world were electrified by the announcement of Facebook’s plan to introduce its own cryptocurrency – Libra. Although the company has yet to disclose details of how Libra can be acquired and used, it is understood that the blockchain-based virtual currency will be available for purchase via a digital wallet.

One may reasonably speculate that it will also be awarded to users for certain activities and behavior (which is similar to the way in which loyalty currencies already work). Users will be able to send currency to other members, convert it into other cryptocurrencies, and use it to pay partner companies that accept it. While U.S. regulators have temporarily halted Facebook’s plans and raised a question mark over Libra, the social media giant’s intentions in this regard can be seen as part of a broader shift.

Large ecommerce companies and digital platforms (such as Rakuten and Line), as well as some digital startups, are experimenting with developing token-based ecosystems in which customers can freely transfer their digital currencies and loyalty points between different programs and wallets in real-time, and trade or pay for virtually anything.

Consider for example the startup called GOZO. This company aims to establish a blockchain-based decentralized clearing house mechanism for loyalty points. Another example is GAT (Global Awards Token), a startup that has developed a platform through which members of different loyalty programs can trade, deal and make offers via GAT’s own, listed cryptocurrency. Big players with long-standing loyalty programs across different sectors are monitoring this situation closely. Earlier this year, my team worked with a leading Asian company on a loyalty consulting engagement which, among other topics, included moving from a standard loyalty program to cryptocurrency-based architecture.

It must be noted that these cryptocurrency models are yet to be proven. Nevertheless, if they and similar initiatives are successful, there is no doubt that they will bring loyalty programs of all kinds closer to full liquidity scenario. In such a landscape, boundaries between loyalty programs will no longer exist, and currency earned in one program will be easy to use outside.

Opportunity or threat?

Increasing liquidity of loyalty points (and loyalty currencies in general)  definitely presents a tremendous opportunity to improve loyalty program member experience. It would also lead to fewer points being unused (lower breakage rate), by improving redemption rates, hence increasing customer satisfaction, while lowering the financial reserves that need to be maintained to cover unused points in customer accounts. But at the same time, this evolution raises serious questions related to the loss of in-house control over loyalty currency outflows/inflows, and the financial implications of this.

Some companies may find they are at risk of becoming only currency issuers, while others will bear the costs and benefits of higher redemption rates. Thus, the biggest players must monitor developments closely. It may also benefit those with sufficient resources to start small-scale experimentation with loyalty cryptocurrencies, in order to test concepts early and be ready to scale up for mass roll-out before the market changes irreversibly and they find themselves left behind.