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Ferguson: Will blockchain disrupt coalition loyalty?

Consulting firm Deloitte continues to be all-in on blockchain-enabled loyalty programs. In a lengthy article in the latest Wall Street Journal, a group of Deloitte authors convincingly lays out the case for a new generation of frictionless, secure, and decentralized loyalty networks enabled by the blockchain. While their remains uncertain incentive for major brands to forgo the complete control enabled by proprietary loyalty programs, there is one major sector of the loyalty industry that should be taking seriously the threat of disruption: the big coalition loyalty program providers.
By Rick Ferguson
The Deloitte treatise outlines many of the standard arguments in favor of blockchain enabled loyalty programs: The low cost of implementation; the embedded business rules and "smart contracts" that enable frictionless exchange of loyalty points by consumers participating in multiple programs within the blockchain network; the nearly endless redemption possibilities enabled by pay-with-points rules anywhere within the network; and the ability to enable all of these interconnected programs without the need for an intermediary. Typical of these utopian promised is this description of a consumer utilizing the blockchain loyalty network:
"Consider Alice. When she purchased an airline ticket with a credit card, the airline and credit card provider could immediately transfer loyalty tokens to her digital wallet. During her trip, she could access the loyalty points and redeem them with another network participant such as a large hotel. She could also make micropurchases—a cup of coffee, for instance—along the way. The transactions would be instantaneous and secure, there would be only one user interface, and Alice could use the accumulated points in the manner she chose."
There's everything to like about this imagined scenario, at least from the consumer standpoint. What program member wouldn't want to redeem loyalty currency anywhere in the network, for anything she wanted? If these utopian visions become reality, then consumers may one day truly enjoy the freedom of a completely fungible, liquid virtual currency. From a business standpoint, massive infrastructure, reward fulfillment costs, burdensome program liability, and loyalty platform costs would go the way of the dinosaurs.
Still, there are many questions about the blockchain future that Deloitte and other blockchain evangelists have yet to address. Here are two:
Driving behavior change. The danger of enabling a true virtual loyalty exchange, in which members earn in the background and redeem for small point-of-sale rewards, is that there is little incentive in this model for consumers to change their behavior by increasing frequency, basket size, or share of wallet. Sure, they'll take the currency, and participating brands can still reward bonus currency to drive specific behavior change. But behavior change enabled by redemption activity - saving up currency for that big ticket item, or booking that extra stay to earn platinum status, for example - might fall by the wayside. 
To enable redemptions that drive behavior change, programs might actually become more complex - imagine a program offering one currency that can be redeemed anywhere, and another currency that can only be redeemed for in-kind rewards or status. We'd be looking at airline "qualification miles"-type rules run amok - and that scenario results in more friction n the system, not less.
Privacy and data ownership. Neither does the Deloitte article address the elephant in the room whenever the blockchain future is discussed: who owns the data? In a traditional coalition model, the third-party coalition provider owns the member database, and can implement strict data privacy rules that comply with local government privacy regulations. Any cross-marketing amongst coalition partners is managed and controlled by the coalition operator, ensuring that consumer privacy is protected, that all communications are opt-in, and that an invested party controls the database.
Blockchain does, we must concede, promise relatively secure and fraud-proof transactions, which might be an improvement over massive, centralized loyalty databases vulnerable to hacking. Imagine, however, implenting privacy and data ownership rules in a completely decentralized loyalty network. If your customer earns your currency and then redeems at a merchant elsewhere in the network, who gets to own the record of that transaction? Can you send an offer to that customer based on that redemption activity? Can the merchant? Who gets the right to market to that member, and what rules protect her privacy? How can she opt out of communications within the network? Must she opt out with each individual network partner? Again, the decentralized nature of the network makes enabling data ownership and privacy rules potentially more complex, not less so.
Still, if I were head of strategy for one of the big global coalition providers, I'd be looking very carefully at blockchain's potential to catastrophically distrupt my business model. If blockchain works as promised, where's the need for an Air Miles, or a Nectar? The days of a functioning blockchain loyalty network that reaches critical mass may yet be a ways off. If the past decade has taught us anything, however, it's that disruption no longer happens at the pace of decades - it happens at the pace of fiscal quarters. Deloitte may not have shown us a clear vision of the future, but there's no doubt that they have their telescope pointed in the right direction.
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer Group.