How loyalty broke and why web3 can fix it

Richard Hamerton-Stove Client Director

7th July 2022 • 5min read

Loyalty is broken. ‘We appreciate your loyalty’ greetings don’t fool anyone. Most of us can recall crappy experiences.

Airlines and banks are the main culprits. About 10 years ago, I used to fly a lot. I’d collect lots of air miles. Up to about 50,000 miles, I could use the miles to ‘buy’ a flight. Now the same flight needs a lot more miles, which are harder to collect. There are big blackout windows and ‘taxes’ that didn’t previously apply. The overall impression is that my ‘loyalty’ is no longer as valued as it was before. In fact, it's worse than that. It feels like the thing I had has been taken away.

All airlines behave in the same way, so now I’ve got maybe a dozen auto-initiated but dormant loyalty schemes on the go. They’re worth nothing to me and nothing to the firm that runs them. Broken. Nonetheless, loyalty schemes continue to flourish and attract customers. For instance, Deloitte found that 80% of people were more likely to choose a bank that offered rewards.

How loyalty schemes are supposed to work

Loyalty used to be human. The grocer recognised Mrs Blennerhassett as she came into the shop, brought out the reserved items he’d set aside for her and she spent the rest of her budget in his shop. Good for both sides. No points scheme required.

As business scaled, the human aspect couldn’t keep up and so we ended up with all manner of systems to take its place. The best schemes were data-driven. Marketers could identify customers with good potential and quantify their value. This, in turn, allowed them to quantify the value of the offer they provided and achieve some measure of equilibrium. Loyalty schemes appeared to work. Customers felt valued and were inclined to be loyal. Companies had a means of securing their customer base and sustaining profits.

As loyalty schemes became ubiquitous, their individual value declined. The digitising of the economy further reduced their value as the scheme weakened. Price transparency increased and switching became easier. Again, the scheme value diminished. Individual customers may have been just as loyal, but their personal value was no longer recognised in the aggregate.

Individual customers may have been just as loyal, but their personal value was no longer recognised in the aggregate.

Some firms reacted by trying to look at the bigger picture. Amex looked at pooling data from multiple affiliated brands to piece together a more holistic picture of customer behaviour. Unsurprisingly, this proved very hard as the IT teams grinded through a horrible inter-enterprise proxy data integration project. After lots of time and money, the idea was shelved. A failure. However, it does ably illustrate the fundamental issue. The data belongs to the customer, not the corporation. This remains the case no matter how many disclosure and compliance boxes are ticked. The best single view of the customer is the customer themselves.

So loyalty is hard, crowded and imbalanced in terms of value distribution. How do you fix these problems and provide the enterprise and the company with a scheme that drives value and loyalty for both? How can a user keep track of their own data? How can companies solve the data integration problem? How can value be shared more equitably?

Can web3 help solve this problem?

Web3 is a vast and fast-moving space. It could, however, point to a solution. Web3 customers connect with web3 apps (DApps) through a wallet such as Metamask. The wallet acts as a pseudonymous identity. By connecting a wallet to a DApp (running behind a website), a user effectively logs on to the service. A wallet also holds digital assets such as coins and tokens. The DApp can use the tokens to recognise a users’ rights. A user can also pay directly for goods and services from the wallet using coins or tokens.

The coins and tokens don’t actually reside in the wallet itself. Instead, the wallet holds the customer’s unique key that allows them to control the asset. The asset resides on the blockchain where it was mined or minted. So if a company issues loyalty points or tokens on a distributed ledger like a blockchain, it will have a complete view of all the points it has issued, who owns them and what has been done with them.

Blockchains such as Bitcoin and Ethereum are permissionless, meaning that anyone can interact with the blockchain without needing permission from a centralised entity. However, Ethereum allows ‘smart contracts’ to control or permit certain transactions. In loyalty terms, smart contracts can be used to prevent or allow users to distribute points to other wallets/users. They can also be used to allow certain retailers to join the scheme without the retailer in question being required to stand up complex IT systems to link into the brand that issued the points. Instead, a retailer can simply buy an NFT from the brand in question (a transaction that takes seconds), assign it to their corporate wallet and be included in the network as the NFT is recognised by the smart contract controlling the points. No NFT, no transaction.

Putting these three technologies together gives brands and customers a solution to many of the problems that were holding them back before. Users with a web3 wallet can spend loyalty points and even trade them with other end customers. For example, I might earn points from spending on a credit card. The points earned are immediately available to buy a sandwich with any retailer signed up for the scheme. There are networks of companies that just about offer this already but the setup and maintenance costs are high and the customer experience is awkward. In this way, the economics of both build and spend are reduced and the UX is simplified.

Putting these three technologies together gives brands and customers a solution to many of the problems that were holding them back before.

Brands wishing to join a rewards scheme can easily ‘integrate’ with the network and massively reduce the costs of entering and operating the scheme.

NFTs as proxy membership cards is another intriguing use case. Current web2 schemes require members to keep hold of a digital or physical membership card. In both cases, the card proves my membership but little else. With an NFT, brands can now create programmable schemes to enhance the utility and thus the value of membership. The owner of an NFT might buy a ticket to watch a football match. If they use their wallet to make the purchase, the retailer will also know that they’re a member by looking at the NFT held in the same wallet. Any discounts or perks owed to the NFT holder can automatically be applied to the purchase when buying the ticket. No need to remember special numbers, redemption codes and what have you. Similarly, any loyalty points due as a result of the purchase can be allocated immediately, and become available to spend straight away. Of course, brands can choose to limit points redemption against particular purchases using blackout windows or limited redemption opportunities. This, too, can be done programmatically by interacting directly with the underlying ledger.

Transferable points are another potential use case worth examining. We’ve all experienced the frustration of unused points being lost or expired. Imagine if users could transfer or sell the points to their friends or even the highest bidder. With web3, that’s now a distinct possibility. Distributed ledger technology (DLT) genuinely recognises the end user’s ownership of a point, and the permissioned element allows the issuer (brand) to maintain a level of control over how points are redeemed or transferred.

Imagine if users could transfer or sell the points to their friends or even the highest bidder. With web3, that’s now a distinct possibility.

So why hasn’t it happened yet?

Well, it’s still early. Customer adoption of web3 wallets is still in its infancy. Established schemes like Starbucks have over 25m users and over a billion dollars in ‘float’ or pre-loaded credit on their loyalty cards. The scheme is working really well for Starbucks and, to a lesser extent, its customers. Expecting Starbucks customers to download a Metamask wallet isn’t really feasible but a gradual transition of the underpinning infrastructure to web3-native technologies is feasible without disrupting the UX.

So yet again the battle between the start-ups and the incumbents comes down to whether the former nails distribution before the latter starts innovating.