Brands must tokenize their loyalty and rewards programs

Published at: Aug. 28, 2021

The adoption of nonfungible tokens has served as a practical entry point for users joining the crypto economy, driven primarily by their respective fandoms and the benefit-centric nature of the tokens. For instance, if you're a Lebron James superfan, you can understand why “The Block” from the 2016 NBA finals is valuable on NBA Top Shot without understanding the blockchain. But when it comes to brands, stablecoins are likely to become the biggest entry point.

Reimagining rewards points

Selling to existing customers costs brands less than acquiring new ones, which is a leading reason why more than 90% of companies have some type of customer loyalty program. Rewards points are one of the most effective methods for increasing both customer loyalty and revenue. For example, Starbucks Rewards is one of the most successful rewards programs around. It has more than 19 million members, with the redemption of points responsible for almost 50% of company revenue. Starbucks utilizes Starbucks Rewards to align with its business goals in a way that adds value and increases customer engagement through a fun, gamified approach.

Starbucks’ approach to reach the masses is very different from Neiman Marcus, which is focused more on status and exclusivity through its VIP, tiered rewards program InCircle. As an InCircle member climbs the tiers, they unlock access to concierge services that help customers plan extravagant vacations or attend sought-after events. Effective loyalty programs are not a one-size-fits-all solution, but a carefully tailored program can do wonders for revenues, engagement and retention. The evolution of digital assets now allows brands of any category to offer their consumers a unique and memorable experience.

The limitations of loyalty and rewards programs

While it's undeniable that loyalty and rewards programs are an essential component of the consumer-brand relationship, they have their limitations. Complexity, lack of liquidity, and interoperability are some of the main roadblocks to expanding loyalty and rewards programs to more customers. The lack of clarity around program rules leads to a lot of value left on the table.

According to a report published by Clarus Commerce, 75% of consumers want to be rewarded for engagement beyond their purchase. This alone signals the need for innovation and creates a massive opportunity for brands to revolutionize the business of loyalty.

When it comes to liquidity, the use of most points and rewards is limited to their respective brand ecosystem; consumers cannot redeem them at another company. Hotel brands such as Hilton, Hyatt and Marriott allow points to be used like cash within a certain threshold. However, this is only permitted during hotel stays — and in most cases, points are valued differently than dollars. That is not to mention issues like blackout dates or the limited number of rooms available for points. Because these programs lack interoperability, points are trapped behind a walled garden, restricting the movement of value. Impeded value transfer and lack of cross-program communication results in lower customer engagement and, in some cases, voided points.

If points systems more closely resembled cash in their ability to be spent, they would be much more successful. Despite these varying degrees of liquidity, what appears clear is that brands embracing this change are looking to grab consumer attention by introducing as much flexibility as possible in the usage of points currency.

Enter: Branded stablecoins

A branded stablecoin is a price-stable digital asset issued and supported by specific — or groups of — brands, enterprises or institutions. Branded stablecoins, which can be embedded directly into consumer-facing applications, offer brands a novel way of connecting directly with customers and acquiring insights to regain market share from competitors. Because blockchain and cryptocurrency remain strange concepts to most consumers, it's essential to have a seamless experience where users may not even realize blockchain technology is powering the system.

Enabled by secure and transparent decentralized ledger technology, branded stablecoins provide marketing intelligence to brands on who their biggest fans are. At the same time, branded stablecoins incentivize and reward customers for their loyalty. Brands can store user purchasing histories on the blockchain and then apply associated savings to their purchases in the future. It’s akin to loyalty points but less complicated, more liquid and ultimately more useful. Other features could include removing the need for a credit card or even providing interest on branded stablecoin savings to incentivize customers to hold.

A bumpier on-ramp before takeoff

Despite branded stablecoins being a step in the right direction, tokenized reward systems are still a form of centralization. A third party — in the form of a brand, bank or both — may be present to achieve one-to-one stability, bridging the gap between traditional finance and crypto. The upside to this centralization is that it potentially presents a more intuitive experience for the user, where they don’t have to download different apps or become acclimated to a new process. However, brands could find themselves having to make a hard decision between a frictionless, centralized user experience or a bumpier, decentralized on-ramp.

There is also the brands’ bottom line to take into consideration: Minting and redemption costs can be high due to expensive gas fees. Compounded with the brands’ operational, auditing and compliance costs — and combined with interoperability with legacy banking systems — this could present expensive barriers to entry. The uncertainty of regulations makes the waters even murkier. Brands might need to decide on taking a loss upfront for delayed future benefits. These are nuanced, mission-critical decisions that brands will have to make.

Consumers feel empowered and perceive greater value when receiving currency in their app instead of recieving points. For many, brands are an identity symbol. Let's say Gucci identifies you as an ambassador and airdrops Gucci tokens to you as a thank you for posting positively about the brand across social media using your “GucciCoin” public tag. If you own a certain amount of “GucciCoin,” you may get access to an elite community, be it a physical space (an exclusive event, concert, in-store showroom, etc.) or an online one.

Perhaps you even get access to advanced or limited-edition merchandise drops others wouldn't get and receive an NFT that allows you to showcase your status. Branded stablecoins are a win-win for brands and customers, enabling consumers to signal their support while brands increase engagement and loyalty.

Branded stablecoins provide a gateway for an interoperable, liquid and frictionless future. One day, maybe not so far off, a customer will have a digital wallet filled with all of their favorite brands, a global ecosystem opening up the floodgates for mass adoption.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Michael Gord is the managing director of the DigitalBits Foundation and founder of GDA Capital. He has contributed to some blockchain ecosystems, including TRX, LRC, and ONT. He also served as the first enterprise blockchain developer at Toronto-Dominion Bank (TD Bank Group), one of Canada’s largest banks.