Catalyst

Using blockchain technology for loyalty schemes

| Updated on April 27, 2018 Published on April 27, 2018

It has several advantages, beginning with improving privacy of customers

Technology is disrupting the world, as we know, and with innovations happening every second, the tech community is in a constant state of flux. One of the buzzwords that is catching everyone’s attention is blockchain technology. Brands are always experimenting with newer technologies to engage with their audience to gain a competitive edge and make their customers stick to their platform/product. Like any nascent technology, blockchain is also full of promises, enabling enhanced brand-customer relationships, but has a long way to go before making waves in the mass market.

Let’s understand the concept first. Blockchain is a shared, open ledger that allows the community (peer-to-peer network) to record transactions and track assets. An asset can be tangible or intangible, such as a house, a car, cash, and intellectual property such as patents, copyrights or branding. Virtually anything of value can be tracked and traded on a blockchain network. To be clear, while the blockchain contains transaction data, it’s not a replacement for databases, messaging technology, transaction processing or business processes. The blockchain contains verified proof of transactions. However, while blockchain essentially serves as a database for recording transactions, its benefits extend far beyond those of a traditional database.

To ensure customer stickiness to the brand and its offerings, companies usually have loyalty solutions as part of their marketing strategies. Traditionally, customer loyalty solutions are built on top of centralised database technology where a single centralised database instance is used to record issue, transfer and redemption of loyalty awards.

In a blockchain-based solution, every authenticated user is issued with a digital wallet through which he can access his loyalty benefit. After every loyalty event such as issue, redemption, transfer or expiration of loyalty points, a new transaction is generated and signed with user key and sent to blockchain network. These transactions are collected and committed by validators in the form of blocks, eventually updating all network nodes into a single ledger using its inbuilt consensus algorithm. A single wallet can handle loyalty token transactions from multiple brands.

Here are some unique benefits of a blockchain-based solution compared to a traditional database solution:

Centralised vs peer-to-peer distributed solution

Compared to a centralised database solution, blockchain technology does not store transactions at one store/place. Instead all full participating nodes have a copy of the full ledger history. This solves the issue of database downtime and increases security of the overall system. Once set up, block-chain based solution does not rely on a central server. Instead all stores themselves act as servers as well as clients using peer-to-peer network communication. Doing this helps reduce server setup and maintenance efforts, cutting overall costs and downtime and improving resilience.

Transactions’ immutability

Due to use of strong cryptography proof, transactions committed on blockchain are tamper-proof and immutable. Even if a few nodes in the network are hacked, the system can always detect and correct fraudulent transactions. This vastly improves the overall security of the system. The current system is very prone to tampering.

Customer privacy

In a blockchain solution, customer KYC is handled by a separate authorisation service which collects customer data (such as identity proof, phone number) and after successful verification issues a digital certificate which is linked with a public key in the main blockchain. If at any time the customer wants to delete his account, only his/her certificate and linking needs to be revoked as no customer PII data is stored in the blockchain itself. With increasing data privacy regulatory requirements, such as the European Union’s GDPR to kick in next month, businesses need to provide a strong audit trail of customer data collection and provide the customer full control of his/her private data. This approach aims to minimise the exposure of customer data. This also removes concerns regarding incompatibility of GDPR and blockchain because of immutability of stored data and GDPR regulation related to data deletion.

Interoperability and transferability of loyalty perks

A single customer wallet can support multiple loyalty rewards of different brands, with very simple smart contracts executed between brands. Different loyalty rewards can be made inter-portable. Also, with blockchain solutions, it is very easy to allow transferability of loyalty between different user accounts.

Mayank Jain is Manager – Technology, SapientRazorfish

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Published on April 27, 2018
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