Is the market ready for crypto-based rewards?

Loyalty programs are an influential customer retention tactic brands have up their sleeves. Today, as digital currencies take up an increasing amount of space in our minds, on newspapers, and at dinner tables, loyalty programs are witnessing another revamp as crypto-based rewards begin entering the market.

Customers now get rewards in digital currencies, be it Bitcoin, Ethereum, or some stablecoin. BlockFi and Gemini both announced they’re working on developing a crypto rewards credit card, through which customers can earn rewards in crypto for transacting in dollars.

The brand side is also catching on, too. Consumers using Cash App to pay for their food at Shake Shack can now earn rewards in Bitcoin, for example. In this quickly developing space, we ask: What incremental value are crypto rewards bringing to the industry? How are they changing traditional rewards programs? How savvy does the market need to be for them to become mainstream?

The value in crypto rewards

As the hype around digital assets grows louder, there seems to be a growing divide between people who are eager adopters of this new technology, convinced of its longevity, and those who are standing on the sidelines, unsure whether to jump in.

By offering crypto rewards, businesses can create value for both these types of consumers: the ‘crypto bro’ who’d like nothing more than to have more crypto, and the more cautious consumer, who now has a safer and less risky way of becoming a digital asset owner. In an uncertain market like today’s, businesses could increase customer retention through such programs.

“By offering crypto as rewards, businesses are bringing back customers,” said Giuseppe Rimola, co-founder of CryptoPerformance. “With blockchain technology being used, the new crypto rewards are becoming a desirable asset as it is liquid and global.”

Traditional loyalty programs have many challenges and limitations, such as the need to register, create separate accounts, geographical limitations, and limited reward choices, but crypto rewards are changing that. Blockchain has the ability to connect a fragmented rewards market without any conversion. That is to say, if a customer’s rewards are tokenized on the blockchain, she can redeem them at any other company, as long as it accepts crypto. In practice, your airline points are no longer just your airline points – you can go ahead and buy coffee with them.

Additionally, traditional loyalty points aren't usually linked to cash value, while cryptocurrencies are and can be tracked in real-time. With traditional loyalty programs, once the points are locked, and you can't use them, they hold no value, while crypto has a relation to fiat in real time.

According to a Deloitte study, incorporating blockchain into rewards programs can drive the customer experience to the next level: “Blockchain is an ideal remedy for what ails loyalty rewards programs.” The report argues that moving rewards to blockchain allows participating agents – such as rewards program providers, administrators, system managers, and customers – to come together and interact under one system, without intermediaries and without compromising privacy or competitiveness.

There are 5 key benefits of moving rewards to the blockchain, according to Deloitte. First, it reduces the cost of running such programs. Admittedly, blockchain-based programs have a higher upfront cost, but in the long run, they may be more cost-effective in three key departments: system management, transactions, and customer acquisition. Rewards for customers can be set up instantaneously, with no additional cost with smart contracts on the chain. Furthermore, these smart contracts report secure, tracked, transparent transactions to legacy systems, reducing costs associated with errors and fraud. A user’s crypto rewards points can also be processed, recorded, and accessed in real time by multiple vendors — meaning things like credit-lag, i.e the time taken for earned rewards to be credited to the benefactor, can be effectively addressed.

Blockchain-based rewards can enable a more frictionless system for brands and customers, too. For example, a user can store and redeem their airline, coffee shop, and online store rewards in the same digital wallet. Issuers of these rewards have control over where they can be redeemed, and the customer has a smoother user experience.

As crypto becomes more mainstream, more and more brands will look to move into it, creating value for the entire ecosystem. Crypto allows access to new capital and liquidity through new asset classes as well as traditional investments that have been tokenized. There is a growing demand from clients and vendors to want to engage in crypto, moving businesses to adopt crypto and position themselves to receive and disburse crypto, assuring smooth exchanges with key stakeholders.

Lastly, according to the report, blockchain rewards programs can create a safer environment. The technology tracks and records every transaction performed, making it immutable and easily traceable. This renders these transactions irreversible and helps prevent manipulation like double-spending, fraud, and abuse. Such programs can also open up unique business opportunities, as businesses can use the system to create more value-added services for their customers.

Companies looking to reward customers with crypto have not only an opportunity to streamline their rewards programs but also an effective and eye-catching marketing tactic that could add much more value to their brand.

“Crypto provides access to new demographic groups, for example, more cutting-edge clientele that uses crypto and values transparency in transactions, often purchasing much larger than credit card users. Adapting crypto into the company and partnerships positions the company into an emerging space in the future that may include central bank digital currencies,” Rimola said.

Crypto rewards in practice

Some credit cards have been faster in adopting crypto than others — they offer the ability to use cryptocurrencies to buy food, art, and even other assets. In some cases, businesses collaborate to offer customers receiving crypto rewards access to a virtual wallet. These wallets offer benefits such as discounts and prizes at companies using the same cryptocurrency.

Consumers can also exchange crypto rewards for other benefits, like travel or discounts. NFTs are also being used as rewards, within companies to increase employee loyalty, or as marketing strategies.

A trailblazer in this area is San Francisco-based Fold, which launched a debit card offering co-branded with Visa that gives out as much as 10% of cash purchases with Bitcoin. In an in-house study, Fold found around 90% of its existing 90,000 users would "switch spending away from their existing card" for a card with Bitcoin. Using Fold's service, users can choose a flat bitcoin-back rate of 1%-1.5% flat rate on purchases, or spin a wheel to win up to 100% return, and other rewards.

Late last year, Mastercard also stepped into the arena, announcing a partnership with the crypto platform Bakkt. The partnership extended Mastercard's ecosystem of partners, enabling the firm to mature its crypto enablement offerings, which it terms Crypto-as-a-Service. The payment giant also integrated crypto into its loyalty solutions, allowing partners to launch cryptocurrency rewards and create fungibility between loyalty points and other digital assets.

Then there's also Lolli. Lolli works as a Google Chrome extension, which activates as users shop online via their computer’s browser, and offers “Bitcoin Back” when they shop with its retail partners — much like Honey, but for crypto. Retailers on Lolli’s platform include brands ranging from Nike to Sephora, with rewards ranging from 1% to 30% in Bitcoin, depending on the company and the product.

Satsy took a more multifaceted approach to developing and launching crypto rewards. First, it runs an online shopping application, with brand partners ranging from Crocs to Lego and Puma, where users are rewarded with a percentage of their spend, like a cash-back scheme, but in bitcoin. Secondly, it has gamified crypto rewards -- users can play games in-app, take part in tournaments and challenges, and earn bitcoin upon completion. Lastly, consumers can partake in surveys, answer questions about Satsy's partner brands, and earn bitcoin for doing so.

Crypto firms like Gemini and BlockFi are working on cryptocurrency rewards credit cards, and so are fintech companies like Upgrade. These work much like traditional cash-back credit cards. BlockFi offers a flat 1.5% back in Bitcoin on every purchase completed, and 3.5% back for the first 90 days after account opening. Crypto exchanges were obviously early to the blockchain rewards party, offering users crypto rewards for setting up accounts or sending out referrals. Coinbase’s sign-up bonus offered $5 to new users for investing in crypto, for example.

Not all shiny, though

At this stage, it is worth noting that crypto rewards have their own set of limitations as well. There are a few popular arguments here.

First of all, with crypto rewards, brands are not able to control investment timing. So, a major risk is that one might collect a sizable amount of crypto rewards, only to have them become worthless later on.

Additionally, in such a market, investors may like more control over when they enter and exit the market, and with crypto rewards, they do not have that control over their participation. Tying into this is another limitation, which is that crypto rewards leave investors with fewer choices and less flexibility over which currency they invest in. With rewards programs, users might find themselves limited to holding one or just a few cryptocurrencies. This also means they may not be able to pay for actual products and services using the limited currencies they hold, and they may have to convert them into fiat currency in order to spend them.

Another drawback of crypto rewards is that holders might be charged taxes and fees. Users may have to pay a capital gains tax on trading their cryptocurrency or could be charged a transaction fee every time they redeem their rewards.

To sum it up, there's definitely value in crypto reward programs, especially for the excited American populace that jumped on board the crypto train during Covid-19. However, as the technology itself matures, there is some time before such rewards become mainstream and reliable.