Loyalty Coins And The Cryptocurrency Long Tail

In this article, I make the case that Loyalty Coins will be one of the killer apps for cryptocurrency adoption in developed economies, and that Loyalty Coins will be one of many factors contributing to a “Long Tail” effect in cryptocurrencies.

I think I am inventing the term “Loyalty Coin”. I did a Google search & did not find the term used in this way. Credit must also be given for avoiding the too-obvious pun. Anyway, by “Loyalty Coin” I mean the crypto equivalent of punched card systems and plastic card systems used by coffee shops, airport parking companies, dry cleaners, and the like.

Predictions:

• 80% probability. Within 2 years, companies will emerge that offer a “Loyalty Coin in a box” service, providing (mostly retail) companies with the application presence, technical support, logistics, and other elements for launching and managing their own private Loyalty Coin programs.

• 80% probability. Within 4 years, a robust ecosystem of Loyalty Coins will develop within developed economies. There will be tens of thousands of Loyalty Coins.

• 50% probability. Loyalty Coins will be a conduit through which many non-early-adopters execute their first crypto transactions.

• 50% probability. Within 5 years, most retail organizations, regardless of size, will have issued their own Loyalty Coins.

Cryptocurrencies will be revolutionary for economies that do not have a functioning central bank system, or that have a dysfunctional banking system. People in many undeveloped countries have empirical reasons -- bad things have happened within their lifetimes -- to distrust their country’s fiat currency. Such is not the case for most developed economies. Credit cards work fine for people who pay their balance, and most of the risk of misuse is carried by card issuers. Cash and checking are efficient and effective for the types of financial transactions that most people perform.

The killer app in developed economies will not be a marginal improvement on something that users can already do. There are already credit cards that offer a marginally better deal than I am getting now, but I don’t apply for them because it’s too much trouble in exchange for a marginal benefit.

The killer app in developed economies will be something that cannot be done at all, or for which the crypto user experience is so overwhelmingly better than the legacy experience that it quickly invalidates the legacy model. Loyalty programs fall into this category.

Consider, for example, a recent experience at Rite Aid. I go there seldom, so I stock up, buying a 4 month supply of whatever I need. In this case, I was buying four of a $50 item (I am rounding up prices for simplicity). Here’s the problem: It was $50 for me, but $35 under their loyalty program. Rite Aid was offering me two bad choices:

• Sign up for yet another loyalty program, handing over my personal data, incurring spam, getting annual “privacy” notices in my mail and “updated terms” and other fine print that I am supposed to read but never do, and fattening my wallet with another marginally useful card. Annoying.

• Pay the perceived rip-off price $200 instead of the $140 that other people are getting. This goes against human psychology. I know, I know, it’s not really unfair because we are all free agents and blah blah blah, but it feels unfair. A full treatment of this topic is beyond our scope for the moment.

By contrast, consider the crypto model that will eventually prevail. To join Rite Aid’s loyalty program, I open an app on my smartphone and scan a QR code provided by Rite Aid. I only do this once. This gives me an address on which to manage my Rite Aid Loyalty Coins (RALC). I am anonymously but uniquely entered into the Rite Aid database. None of my personal data is exchanged. There is no plastic card or paper punch card, just the smartphone app. It’s the same app that manages coins issued by other retailers. When I check out, I get the reduced price through a bluetooth connection to my phone. Alternatively or in addition, I may be issued RALC. I can use RALC for benefits at Rite Aid, or I can exchange RALC on a secondary market for other Loyalty Coins, mainstream coins, or fiat currency.

I give the example of Rite Aid because it comes to mind from recent experience, but I don’t think that will be the main use case. Big retailers already have the wherewithal to manage loyalty programs. The main use case will be with smaller businesses that do not have the resources to start and maintain a loyalty program.

Here is how it might work for a small coffee shop. Let’s call the shop Caffino. To join, I open the same smartphone app, and scan Caffino’s QR code. This gives me an address on which to manage my Caffini (Cafino-specific Loyalty Coins). Every time I buy a coffee at Caffino, I am issued .05 Caffini which is automatically banked onto my Caffino address on my smartphone app. When I have accumulated 1.0 Caffini, I get a free coffee. Or I can hoard them for later use. Or if I want, I can exchange accumulated Caffini on a secondary market. Or I can just hand them over to my wife. Or I can contribute them to the guy panhandling in the street.

What are the benefits to the end customer?:

• I never give up my personal data
• I don’t carry cards in my wallet. I never lose cards or forget to bring them.
• The notion of an expiration date probably goes away, so I don’t lose the value of a paper card that is expired even though it’s 80% punched
• I join more loyalty programs so I get more discounts and more preferential treatment
• I can aggregate coins across many programs to fund a large purchase that I might not otherwise be able to afford

What are the benefits to the retailer?

• Participation skyrockets
• Due to increased participation, retailers collect much more data on consumer behavior than was previously possible. Though demographic data is excluded during enrolment, it can be inferred over time
• When users exchange coins on the secondary market, the buyer might be a new customer who would not otherwise have frequented that business. Many such customers will be bargain shoppers who don’t return, but others will become new repeat customers.
• Retailers are no longer subject to the risk of losing their customers’ data, and to the catastrophic damage that accrues to their brand if and when such data is hacked and used to steal their customers’ identities.

Retailers get what they need and want (information & loyalty). Consumers get what they need and want (preferential treatment and privacy). Neither party is burdened with the un-necessary exchange, storage, and protection of data that is not really needed to sustain the relationship.

Such a system would enable modest network effects that are impossible under today’s loyalty programs. The more users who sign up for the more loyalty programs, the more robust the secondary market is for Loyalty Coins, and therefore the more value to each participant, because they can exchange coins they don’t intend to use for coins that they really need or want at the moment.

But here’s the catch. When every coffee shop is eventually offering a Loyalty Coin, then they are all at parity, so customers are not particularly motivated to patronize one over another. At this point, it is a disadvantage for the coffee shop that does not offer a Loyalty Coin. So everyone offers a Loyalty Coin. Hence the title of this article.