Recently Loyalty & Reward Co caught up with Chuck Ehredt who has been active in the blockchain loyalty space for several years. Chuck is a seasoned entrepreneur, as well as being CEO and Co-Founder of Currency Alliance. Chuck spotted the potential for blockchain to transform the loyalty space early on, and has engaged in extensive research as well as a number of proof-of-concept pilots.
Here’s a transcript of our interview:
Hi Chuck. It’s a pleasure to speak with you today. I look forward to better understanding your journey with blockchain and how it could be applied to loyalty use cases. Can you maybe start by providing some background?
About 4 years ago, as we were designing the Currency Alliance platform to enable rapid and low cost connectivity between partners in loyalty coalitions, our team evaluated whether blockchain could provide the base infrastructure to meet our business and technology objectives. We rejected blockchain at that time for 4 specific reasons:
- Rapid pace of technical change
- Lack of partners using blockchain
- Unpredictable operating cost
- Lack of mature Smart Contract management tools
However, we continuously re-evaluate the evolution of blockchain because we believe that it could totally disintermediate our services over the next 8-12 years.
At the periphery of our core platform, we have been using blockchain in a number of ways for the past two years, and will continue to experiment – given the probable magnitude of impact blockchain will have on business and society over the next 2 to 20 years.
In any case, I´m very happy we invested this effort, because it helps us not fall prey to all the hype of the past 3-4 years.
Working with Finboot, Currency Alliance just delivered a blockchain project for a major, global travel payments organization to streamline reconciliation and settlement of loyalty program redemptions between travel brands – which has also helped us refine our beliefs on how this technology is likely to be deployed by travel brands with loyalty programs.
There is plenty of good information on your website and elsewhere on the general characteristics of blockchain, so I am not going to reiterate that here.
Perhaps we can discuss the major advantages and disadvantages of blockchain in the context of loyalty programs and then go into specific Loyalty Use Cases for blockchain?
That would be perfect. Let´s dive in. In the context of loyalty applications, what do you see as the major advantages of blockchain?
First of all, we need to recognize that the blockchain technology has a number of common characteristics, but there is not one blockchain. In fact there are already tens of thousands of blockchains – most of which are incompatible with each other. Public blockchains are just that. Public. Anyone can access them, write transactions to them, mine blocks, etc. Most of the existing loyalty tokens are operating on public blockchains, however, I do not believe the majority of loyalty programs will use Public Blockchains to support their business.
Since I am focused on business applications, my comments are made in the context of a Private blockchain (which could be run by a single company) or a consortium of companies that agree to collaborate to operate a single blockchain. In a private or consortium blockchain, each entity that accesses the blockchain must be granted permission – which allows a greater degree of capability to protect data, limit partnerships, etc.
Blockchains benefiting from multi-node consensus are distributed over a network – with a primary objective that no one company (or node) is in control of the blockchain itself.
If no one company is in control, trust is introduced – precisely because no one has control and each node verifies that historical transactions have not been tampered with.
It is very important to recognize that data recorded in a blockchain is visible to all authorized parties. This is great for building trust based on transparency, conducting an audit, or verifying certainty of information, but most organizations running a loyalty program would not want the majority of their data to be visible beyond their own organization
Furthermore, data cannot be changed without all parties knowing. The blockchain algorithm responsible for creating new blocks will reject any version of the blockchain that has been tampered with – even by changing a single byte.
As you know, Philip, we have been overwhelmed with hype during the past 2-3 years – which has helped accelerate learning, but has also confused many of the issues. I believe we are now nearing the end of the Hype Cycle – which will allow each of us to get on with our business.
In terms of summarizing blockchain benefits in the context of loyalty, I would start with Smart Contracts.
Smart Contracts are programs written to execute on a blockchain and cannot be tampered with – without other authorized parties knowing. For routine transactions, or infrequent transactions depending on a specific event, or series of events, this is a very powerful capability – that can reduce cost and ensure compliance with the defined criteria and accepted variables in the Smart Contract. For example, a Smart Contract could be established to give a customer a 1000 point bonus after every 5 bookings on your direct sales channel.
Smart Contracts allow organizations to push application layer logic into the blockchain network and out of legacy systems. Given that maintaining Smart Contracts may be much less expensive than maintaining legacy loyalty program management systems – this is a very significant advantage even though most organizations don´t measure this indirect cost.
However, errors (or logic that is not compliant with the business objectives that gets programmed into Smart Contracts) will also be executed – so it is important to ensure Smart Contracts are defined correctly and tested thoroughly to avoid unexpected consequences (which are difficult to un-do).
Connectivity between partners can also be greatly simplified – if each entity only needs a single connection to the blockchain. We avoid a large number of point to point integrations between partners. This could potentially remove the IT department as being the bottleneck in adding partners into a loyalty coalition.
Authorization (or user permissions) to access the blockchain can be based on specific certificates associated with the blockchain, but it is also possible that authorized users within an approved organization can access the blockchain with their corporate credentials. Such authorization could also be across multiple blockchains.
Once a blockchain has been established with Smart Contracts that can apply many of the business rules, it is possible that IT involvement could be reduced – since non-technical people could enable or configure the Smart Contracts to activate a new partnership, create or change loyalty rules, or manage the permissions of many users.
With all data tamper-proof and fully visible, the use of Smart Contracts (as an automated agent to run a batch process) could enable routine activities (such as reconciliation and settlement) to be performed in a much more streamlined and cost-effective manner.
Many loyalty programs are operated or administered by a 3rd party organization – which has an associated cost. These 3rd parties are often relied on due to their subject matter expertise or to objectively look after the best interests of multiple parties. Blockchain (configured correctly) could take over much of this work – driving cost and intermediaries out of the business.
Blockchain transactions are processed every 10 minutes in the Bitcoin Blockchain but in near real time on other blockchains. Transactions between partners could be automated to the degree that customers get their points in a hotel program within minutes after settling their rental car invoice.
By easily adding more partners that issue your loyalty currency, customer can earn from many more places they shop. Selling more points to more partners in itself can increase revenues, while generating greater customer engagement and velocity of earning that build stickiness to the loyalty program.
Thanks for that summary. Those advantages are consistent with most blockchain initiatives we see that are gaining momentum. Where do you see the disadvantages of blockchain in the context of loyalty?
As mentioned, too much fungibility of the loyalty currency would defeat the purpose of a loyalty program in the first place, but since we are not focused on loyalty tokens in this discussion, I´ll skip to the business issues. In my opinion, there are not too many technical issues since blockchain holds the promise to be able to support almost any type of transaction.
Errors in transactions or Smart Contracts will remain in the blockchain forever. They can be corrected only with new Smart Contracts or adjusting transactions.
Many companies could be connected to the same blockchain – and some of them could be competitors. Therefore, brands will have to be careful how they program how their currency can be used in Smart Contracts, or brands could lose the degree of control they have had. Most brands would not want a customer to spend their loyalty currency with a competitor (at least not at its full economic value). With many entities co-existing in a common transactional environment, there will certainly be new forms of fraud.
What is most probable is that the desired partners in a loyalty program will be using various blockchains in their businesses. As an industry, we will have to find ways for Smart Contracts to operate across multiple blockchains, a type of blockchain bridge will need to be created.
In fact, it is highly likely that most brands will actually use multiple blockchains – so we need to be conscious how we design our requirements to maximize the probability that they can be enabled.
At Currency Alliance, we manage user authentication and smart contracts at a layer above the blockchain infrastructure – so the loyalty program managed is agnostic to where the transactions are actually stored. This enables portability and avoids lock-in.
In fact, in a major blockchain project we completed last year, the Smart Contracts and User Authentication are managed at a layer above the blockchain itself so transactional data can be stored in one (or many) blockchains – or even in legacy systems.
Moving onto compliance, it is unlikely that governments will regulate blockchains themselves, especially private or consortium blockchains, but they are already regulating crypto-currencies. If a brand converted their loyalty points or miles to a crypto-token, they would become regulated entities in many different countries – and required to comply with laws that could vary widely from country to country.
Loyalty programs need to decide if they want all their data to be immutable and fully transparent. I would argue most will not like this. At a minimum, where GDPR exists, Personally Identifiable Information cannot be made visible in a blockchain.
Furthermore, do we want our data to be distributed or exposed to Cross-border transfers that may violate current laws – or laws that may come to be in the future? It remains unclear how a brand would deal with new regulations that affect privacy – when they cannot un-do transactions committed publicly to a blockchain years before the regulation went into effect.
And, of course if we were to become ´dependent´ on a particular blockchain, or blockchain operated by Partners – who may evolve to have competing priorities, or simply cease to exist, we could be catastrophically affected if much of our data is in one of these blockchain ecosystems.
Businesses fail on a regular basis and there is no reason to believe a blockchain startup is immune to failure. You won´t want your data and/or currency on an infrastructure that no longer gets supported because the engineers move on to something new.
These are some big issues, but as you say there are many people working through them. Let’s shift focus now to talk about the use cases for loyalty and blockchain that you have identified so far. As you know, this is my area of greatest interest and has been covered extensively in my book.
We’ve identified thirteen use cases for loyalty transactions with blockchain. Most are technically feasible today, but only 3-4 are economically reasonable today.
- User Authentication extends well beyond loyalty, but blockchain can be used to authenticate specific individuals as loyalty program members, as well as business users representing an enterprise. The user profile can include permissions (or restrictions) to accurately grant access to data, share data, create transactions, etc.
- Loyalty Rules for earning points or miles can be encoded in Smart Contracts to push the logic out of legacy systems and into the blockchain network. Because blockchain is distributed by nature, this can greatly enhance the scalability of programs, partnerships, and engagement opportunities with members of the loyalty program.
- Loyalty Currency Redemptions can also be automated with Smart Contracts. Whether all steps in a redemption transaction can take place on the blockchain depends on whether the main points bank is on the blockchain itself, or whether a host system needs to be consulted for the member´s points balance prior to permitting the transaction.
- Enabling loyalty currency exchange is perhaps one of the most obvious opportunities, but it is likely to be enabled in a hybrid blockchain and legacy system environment since it is unlikely that most loyalty programs will use a blockchain as their main points bank any time soon.
However, the scalability of exchange using Smart Contracts to set exchange rates between approved exchange partners offers the promise of giving customers much more freedom to put their loyalty currency value toward something valuable to them – making the points/miles more motivating to collect in the first place.
- Creating Dynamic Packages – where multiple services are combined into a single redemption package is a very interesting Use Case because Smart Contracts could dynamically create packages with an airport transfer, flight, and hotel reservation based on a customer´s preferences, current market demand, actual currency exchange rates, etc. and offer that for a specific number of points/miles based on the customer´s profile in multiple loyalty programs.
- And the cost (or price) in points could be held in escrow until confirmation was received that each service was used before funds are distributed to the various suppliers.
- Another type of redemption option that could be made available via Smart Contracts and blockchain is the opportunity to convert (or exchange) the value of points into a gift card or voucher. The gift card value could be assigned to a unique individual, be configured to enable it to be transferred by the individual (or not) and Point of Sale systems could interact with the blockchain to accept payment (presuming sufficient value existed on the gift card or voucher to avoid that value being double-spent).
- As mentioned, blockchains can be used as a distributed database to store value. So, Smart Contracts could be enabled to hold funds until a triggering event – before they release the value to a supplier providing a service. Similarly, Smart Contracts can periodically reconcile accounts between loyalty program partners and automate the settlement process.
- There are many cases today where one supplier such as Avis-Budget or Hertz Rent a Car are willing to match the loyalty tier status of a partner´s program. A member´s status in one or many programs could be maintained in a blockchain and exposed to approved partners. Of course, this is a tricky situation because one hotel group is not going to want to broadcast the names of their most frequent guests to competitors.
- Wholesale transactions such as United Airlines selling billions of MileagePlus miles to Chase bank could be completed on the blockchain, or if IHG had received many Aadvantage miles via various redemptions, they could trade them back to American Airlines via a Wholesale transaction.
- Customers increasingly like to use online tools to take care of themselves – rather than call a service center and wait 20 minutes on hold to get through to a real person. We can imagine many services provided through call centers, websites, or Apps could be automated with blockchain involved in orchestrating the desired outcome in the background. In fact, blockchain should almost always be in the background (like a database) where the customer has no idea what stack of technology is actually meeting their needs.
- Blockchain has a number of data security features which can help with GDPR compliance. However, the inability to delete data and the transparency of content recorded to a blockchain would violate the law in many respects. Therefore, organizations considering blockchain for loyalty applications will need to consider how to store some data off-chain – but possibly make it accessible to authorized users via the blockchain.
Blockchain is a chain of blocks containing individual transactions that cannot be altered. Each block records transactions in chronological order, so it can capture a nearly perfect history of transactional activity. Therefore, it forms an excellent potential audit trail. This may only be useful if all similar transactions are recorded on the same blockchain, since supporting some transactions on blockchain and others in legacy systems may actually make auditing more complicated or expensive.
- Our 13th and final Loyalty Use Case is not unique to loyalty, but can be highly relevant to some earning or redemption products or services. A loyalty program could encode in a Smart Contract that points can be earned only on purchases of products that are certified to be authentic (not replicas or fakes), or a customer many want to be certain their redemption is for a product or service did not involve child labor or come from a country supporting terrorism. Providing access to product information about it source and route to market may be relevant in some situations.
In all, we have identified thirteen use cases for loyalty transactions on blockchains, but there are certainly permutations of each.
And now for the fun part. I realize you don´t have a crystal ball, but would you like to share any predictions for how blockchain and loyalty will evolve over the coming years?
Predicting anything related to blockchain is a challenge because there is so much innovation taking place, and we have the backdrop of many people and organizations promoting their own agendas. However, we feel like we are nearing the end of the hype cycle and the massive proliferation of methods to accomplish business objectives with blockchain will begin to consolidate around best practices and accepted standards.
In terms of sticking our necks out, we believe very few traditional loyalty currencies will be converted into crypto-currencies. In large part this is because travel and retailing brands will not want to become regulated entities in many different countries because their loyalty currency is treated like a form of money. However, there is also the risk of losing control over the value of a brand´s loyalty currency. Normally, the value of a crypto currency is determined by supply and demand. If demand drops, the value usually declines – which would reflect badly on the brand, but also produce problems for their balance sheet. There are ways of maintaining price stability for a loyalty currency, but that is beyond the scope of today´s discussion.
I think it is logical that 6-10 (or 20 or 50) hotel groups could create a blockchain consortium to operate a blockchain related to loyalty in the hospitality industry – where competitors recognize the sharing of cost and keeping each other honest outweighs the disadvantages of maintaining dozens of disparate systems – especially since there is considerable collaboration with airlines and rental car companies. Such a blockchain with a limited number of brands operating mining nodes would permit the electricity costs and development costs to be low enough, that the cost per transaction processed on the blockchain, could be below 1 US cent.
Then of course we have the issue of who you can do business with via blockchain – if few of your natural trading partners have embraced the technology – or are even on the same blockchain. We anticipate that it will still be 2-3 years before a minimum critical mass of organizations are using compatible blockchain services for loyalty applications – to enable meaningful services for customers. No one wants to be first. However, we may find in the next year or two that 5-10 natural trading partners all agree to embrace blockchain at about the same time – which would then generate network effects to bring in additional partners.
As mentioned, it is unrealistic to believe that all business partners will chose the same blockchain ecosystem, so we need to prepare for not only a hybrid environment of blockchain and legacy systems, but also a situation where transactions, Smart Contracts, and user authentication functions are blockchain-agnostic. – and therefore, operate across multiple chains. We can demonstrate this today, but much more work is required to make applications operate with less dependency on a specific blockchain.
And finally, I feel like much of what we have shared with you today is now widely understood by executives across the loyalty programs we talk to; and, I´ve noticed that these executives seem comfortable postponing any aggressive investment in the technology until real benefits can be realized – which depends on a bit more infrastructure maturity and a critical mass of partners to do business with.
In closing, are there any recommendations you would like to share with our audience based on your experience?
I believe blockchain is a very transformative technology that will have a massive impact on business and society over the next 2-20 years. Obviously, there is already considerable impact with crypto-currencies and some enterprises are using the technology for very specific reasons (trading of financial instruments or supply chain management). Given the potential impact, it is never too early to start learning – or keep learning.
You will also have to decide soon whether to build the blockchain skills in-house or find one or more partners to provide services. I believe there is no right or wrong answer to this, but given the financial implications, at a minimum, you will need sufficient skills in-house to select and manage vendors.
I´ve been to a few conferences recently where the sessions on blockchain were downright misleading – but on a whole, attending conferences is a good way to learn quickly, stay abreast of industry advances, and network with others who are also trying to find their way into a world where blockchain use will be prevalent.
The beauty of blockchain (in my opinion) is the opportunity to collaborate with partners at lower cost in order to better serve customers – so talking with existing partners or potential partners about their intentions will help with short-term, medium-term, and longer term planning.
I was recently invited to a meeting of the heads of loyalty for all the Star Alliance airline members, and one of the questions posed was “Ok, we feel like we understand blockchain, but when will be the defining moment when we should embrace blockchain and proceed. My response was “when a minimum number of natural trading partners are also planning to migrate to blockchain – which may be in 2020, but more likely in 2021 or 2022
Over the past year, it has been really interesting to see blockchain applications for loyalty come to life and we expect to enable our clients to continue using traditional technologies as long as those make the most sense for their businesses, but we will also allow clients to port their applications onto one or more blockchains as the technology matures and the right mix of business partners also start using the technology.
Thank you Chuck for this useful discussion. It seems your experience has led Currency Alliance to take a bit of a conservative approach to blockchain, but it is great to see that you are actively helping the industry progress.
We look forward to hearing updates and wish you the best of luck.
Chuck Ehredt is an American living in Barcelona for the past 16 years. As an entrepreneur, he has started 12 companies and also invested in 23 startups as a business angel investor. Chuck is passionate about aligning technology with business objectives. Currency Alliance provides modern technology to loyalty program operators so they can quickly add collaborating partners at very low operating cost – which increases program relevance for the mid-tail and longer-tail customer.
Philip Shelper is a loyalty management consultant based in Sydney, Australia who obsesses about everything to do with loyalty and rewards. His company Loyalty & Reward Co are a leading loyalty consulting firm.
Phil is the author of Blockchain Loyalty: Disrupting loyalty and reinventing marketing using cryptocurrencies. Buy the book.
www.blockchainloyalty.io is a global resource centre for everything blockchain loyalty.