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Tokenization of Loyalty: The Emergence of a New Asset Class



DAte :

January 15, 2024

Tokenization of Loyalty

Loyalty programs are a critical component for businesses and brands, significantly contributing to user retention. The global loyalty program market was valued at USD 16.92 Billion in 2021 and is expected to reach USD 59.49 Billion by 2030. Despite this substantial growth, loyalty programs continue to face challenges. Fortunately, advancements in financial technology, particularly blockchain technology, have the potential to enhance and transform loyalty programs.

The Concept of Loyalty Programs

Loyalty programs - they’re a familiar part of our everyday transactions, aren’t they? Whether it’s that coffee shop you frequent or the online store where you shop, loyalty programs have become a ubiquitous strategy for businesses and brands. But what exactly is a loyalty program?

At its core, a loyalty program is a marketing strategy meticulously designed by businesses to encourage customers to continue to shop at or use the services of their business. It’s a reciprocal relationship of sorts - you show your loyalty by choosing their product or service, and they acknowledge and reward this loyalty with various perks and benefits.

From airlines to retail stores, loyalty programs span across various industries, each with its unique structure and rewards. However, the underlying principle remains the same - to appreciate and reward customer loyalty. It’s a business’s way of saying “thank you” for your continued patronage.

So, that’s the essence of a loyalty program. But how does it work?  

How Loyalty Programs Work?

When we think of loyalty programs, a straightforward process often comes to mind. It begins with a transaction - you purchase a product or service from a business. This transaction isn’t just a simple exchange of goods or services for money; it’s also an opportunity for the business to acknowledge and reward your patronage.

Upon making a transaction, you earn points. These points are a form of currency within the loyalty program, a tangible representation of your continued support for the business. However, these points aren’t immediately available. They need to be validated first, ensuring that the transaction complies with the terms and conditions of the loyalty program.

Once your points are validated, they’re added to your account. You can accumulate these points over time, each transaction adding to your total. And here’s where the fun begins - you can use these points to earn rewards.

Rewards are the end goal of any loyalty program. They’re the incentive, the prize at the end of the journey. They can come in various forms, from discounts and special offers to exclusive products or experiences. By using your points, you can claim these rewards, enjoying the benefits of your loyalty to the business.

In essence, loyalty programs are a cycle of transactions, points, and rewards, a continuous loop that encourages customer loyalty and drives business growth. But as we’ll see in the next section, this cycle isn’t without its challenges.  

Challenges Faced by Loyalty Programs

While loyalty programs have proven to be effective in retaining customers and driving business growth, they are not without their challenges. Let’s delve into some of these issues:

  • Reward Relevance: One of the primary challenges is ensuring the relevance of rewards. Customers prefer to earn rewards where they spend the most. Therefore, businesses need to tailor their loyalty programs to align with the spending habits and preferences of their customers.
  • Perceived Value of Rewards: Another challenge is the perceived value of rewards. Customers want their rewards to have a highly perceived value. This means the rewards should be valuable in terms of monetary worth and usefulness and desirability.
  • Ease of Redemption: Lastly, the ease of redemption is a significant factor in the success of a loyalty program. Customers want to be able to redeem rewards easily and in ways that are relevant to them. Complex redemption processes can deter customers from participating in the loyalty program.

In a report, some startling statistics were revealed about loyalty programs. It was found that a significant 57% of loyalty program members are unaware of their reward account balances. Also, a quarter of the members feel that earning rewards is too laborious. The report also highlighted that 33% of members encounter challenges with the terms of earning rewards. Furthermore, over a third of the members, precisely 36%, expressed that they often miss the opportunity to utilize their points before they expire. These findings underscore the need for more user-friendly and efficient loyalty programs.

These challenges, while substantial, are not insurmountable. The solution lies in leveraging technology, specifically tokenization, to enhance the effectiveness of loyalty programs. But what exactly is tokenization, and how can it help?

What is Tokenization, and How is It Used?

Tokenization is currently one of the best ways to bring real-world value onto the blockchain. But what exactly is it?

Tokenization is the process of issuing a digital representation of different types of assets, rights, or values into a token on the blockchain that can be operated and stored in a digital system. These assets can be physical (like a car or a house), digital (like a software program or a digital artwork), or even abstract (like loyalty points or carbon credits).

Here’s a more detailed explanation of how the tokenization process works:

  • Asset Identification: The first step in tokenization is identifying the asset, value, or right that you want to convert into a token.
  • Token Creation: Once the asset is identified, a digital token that represents the asset is created using smart contracts. This token carries all the essential information about the asset, such as its value, ownership, and other relevant details.
  • Token Issuance: The created tokens are then issued on a digital platform. This could be a blockchain network, a digital marketplace, or any other kind of digital platform that supports tokenization.
  • Token Management: Once the tokens are issued, they can be managed digitally. This includes transferring tokens between users, tracking the ownership and history of each token, and even creating complex logic and rules around how the tokens can be used.
  • Token Redemption: If necessary, tokens can be redeemed back into the original asset. This process is governed by the rules and logic defined during the token creation and management stages.

Now that we know what tokenization is, the question arises: how can tokenization evolve loyalty programs?

Tokenization, a broad and versatile concept, is already being leveraged to create innovative solutions and address existing challenges in various domains. It’s being used to tokenize a wide range of assets, including art, precious stones, property, and equity, among others. This process of converting real-world assets into digital tokens on a blockchain is disrupting traditional systems and creating new opportunities.

One intriguing application of tokenization is its potential to revolutionize loyalty programs. Tokenization can significantly transform loyalty programs, making them more automated, streamlined, efficient, transparent and cost-effective.

Let’s see how tokenization can effectively address the challenges in loyalty programs discussed above:

  • Reward Relevance: Tokenization can help here by allowing businesses to issue tokens that can be redeemed for a wide range of rewards, giving customers the flexibility to choose rewards that are most relevant to them.
  • Perceived Value of Rewards: Tokenization can enhance the perceived value of rewards by providing tokens that can be traded or exchanged, giving them a tangible value beyond the specific reward program.
  • Ease of Redemption: Tokenization can simplify the redemption process by enabling instant, digital redemption of tokens. This not only makes it easier for customers to redeem their rewards but also enhances the overall customer experience.

In conclusion, tokenization holds immense potential to address the inherent challenges in loyalty programs and transform them into more customer-centric, engaging, and efficient systems. It’s an exciting development that’s set to redefine the future of customer loyalty and retention strategies.

Bringing Loyalty On-Chain

The potential benefits that blockchain technology can bring to the loyalty program market are immense and are only now beginning to be recognized by some entities. Zeebu, a Web3 Neobank, is leading this innovation, utilizing blockchain technology and tokenization to revolutionize loyalty programs with its ZBU Loyalty token.

Zeebu has introduced the world’s first loyalty token, ZBU, which is set to transform the way businesses manage and operate their loyalty programs. The ZBU token, powered by blockchain technology, enables secure, instant transactions, expedited settlements, and incentivizing carriers for successful settlements. This innovative approach is set to redefine loyalty programs, making them more automated, streamlined, efficient, transparent, and secure.  

Automated Loyalty Reward with Zeebu

The ZBU token is a fundamental component of Zeebu’s settlement process. Through the use of smart contracts and tokenization, Zeebu has automated the loyalty program to distribute ZBU token rewards for every successful settlement. This means that if party A issues an invoice for value X to party B, and when B settles that invoice, both A and B will instantly receive rewards of up to 3.5% of X’s value in their wallets. Another impressive feature of the ZBU token reward is its effortless redeemability, providing users with a smooth and hassle-free experience.

In conclusion, Zeebu’s innovative approach to loyalty programs, powered by tokenization, is a game-changer in the realm of business operations and a testament to the transformative power of blockchain technology. It stands as a beacon of progress, paving the way for a future where loyalty programs are more efficient, transparent, and user-friendly. This is a significant stride towards harnessing the potential of blockchain technology to create more value for businesses and their customers.