As retail banks face increasing pressure to attract and retain customers, blockchain technology could provide an unlikely ally by boosting consumer incentive programs.
Attractive incentives for new customers have traditionally been used to try and convince people to change banks. Starter rates, one-off gifts and exclusive deals are used to pry account holders away from competitors, and go through the, often complicated and time-consuming, process of switching banks.
But deals for new account holders are no longer enough. With more options available for customers, and greater consumer education and insight enabling people to see what different offers and options they could access, financial companies are also increasingly trying to retain more customers. This is primarily done through loyalty programs. Banks offer exclusive rates for longer term investments, as well as regular use accounts that give cashback or other rewards on an ongoing basis.
Such programs also bring challenges. Reward schemes can suffer from high costs, slow customer service and inefficiencies that negate the positive experiences and consumer sentiment that they are trying to provide. Several UK banks for example have closed down reward schemes in recent years as a result of costs and regulation changes.
In addition, banks, credit card providers and other financial institutions are also under pressure from new market entrants and innovative technologies such as the well-known impacts of blockchain. Alternative cryptocurrencies and tokens have gained a lot of press, and a number of other startup companies and projects are seeking to use blockchain technology to disrupt areas of the financial industry.
However, blockchain itself could also end up playing a role in helping traditional banks. The very technology that many believe is such a threat to traditional banking can be deployed in its favour when used to boost customer rewards schemes.
Banks need to encourage consumers to be more active in their loyalty schemes so that they clearly perceive the benefits they bring and are more likely to keep their account at the institution. The 2016 Bond Loyalty Reportshowed that although the average customer in North America belonged to 13.4 loyalty programs they were only active in about half of them.
Some of the major barriers preventing more activity are long delays in receiving rewards, and the perception (whether real or not) that is too difficult to accrue meaningful volumes of loyalty points. And blockchain could provide a solution to these problems.
A fundamental benefit of utilizing blockchain in reward schemes is the distributed technology's ability to seamlessly and securely link multiple programs. This enables customers to pool their points, securely and efficiently, from several schemes and access bigger rewards a lot faster.
The technology could enable users to have a single ‘wallet’ in which points from multiple schemes are stored and exchanged with ease. Combining many different kinds of loyalty points, potentially in multiple currencies and with several possible exchange options for fiat currency, could make customers far more likely to stick with the bank that currently holds their account.
According to Deloitte, blockchain could also speed up loyalty schemes and remove some of the friction customers currently feel. Banks have invested heavily in ensuring a fast and modern user experience across their services, and by using distributed ledgers to facilitate quicker transactions and loyalty rewards, the benefits could compound.
Many financial institutions are currently looking into the various ways in which blockchain could help improve operations. The Royal Bank of Canada for example has trialed it in a number of settings, including for boosting loyalty schemes.
As organizations continue to assess how blockchain can improve their services it is important that they keep security considerations in mind, both for themselves and their customers. Building faster user experiences and connecting loyalty schemes from different providers will need a sophisticated approach to managing machine-to-machine communication.
In addition, with consumer web and mobile banking on the rise, often across multiple devices for each user, it is important that every organization is able to understand which machines (both physical and virtual) their own systems are interfacing with regularly in this distributed network. Companies will be expected to track and secure all such connections with the most relevant encryption methods and machine identities in a transparent, auditable and customer-focused manner.
Financial institutions are facing greater pressures from new market entrants every day, but there is also a significant opportunity to attract new business as it is becoming easier than ever to switch accounts. Ultimately, those businesses that are able to efficiently deploy schemes which can demonstrably improve consumer experiences, while maintaining user safety, privacy and trust, have the potential to capture new customers for a long time to come.