Blockchain could spur credit card rewards revolution
Bitcoin is a bust for banks, but the technology that powers it could be a godsend for credit card rewards fanatics.
The financial industry has largely eschewed the bitcoin – a digital currency that enables peer-to-peer transactions without a bank or central authority.
Credit card issuers and payment networks, however, are working with tech firms and consortia to harness blockchain technology to speed up payments and money transfers. Experts say the digital ledger technology could enable money to travel with the immediacy of information flowing over the internet.
Blockchain could also modernize the credit card rewards system so that points can be transferred between merchants more quickly and better protected from fraud. The change may not stop there – it is believed the technology will eventually allow consumers to send loyalty points to one another and redeem them at places where they haven’t been able to before.
What is a blockchain?
A blockchain is a chronological ledger of transactions that is shared on a distributed digital network. The network can be public, with unlimited access (as with the bitcoin), or private and permission-based.
In a typical blockchain transaction, the specifics of the deal are entered into a “block,” often using language that looks similar to HTML code used to build websites. The two parties in the transaction are each assigned a private key – a unique identifier – that permits access to the block. Once each party has agreed to the transaction and digitally signed the block, the transaction is automatically validated by the shared network. Once validated, the block is added to the chain of prior transactions and the payment between the two parties is settled.
In a May report titled “Profiles in Innovation,” researchers at Goldman Sachs said the distributed nature of blockchain technology could eliminate the redundancy and reconciliation of centralized transaction ledgers that are kept by banks.
“In most real-world examples ... multiple parties already maintain duplicate databases containing information about the same transactions,” the report read. “And in many cases, the data pertaining to the same transaction is in conflict – resulting in the need for costly, time-consuming reconciliation procedures between organizations.”
Security is improved because the technology relies on encryption to verify the identities of each party in a transaction. No other parties can meddle in an ongoing transaction or retroactively alter it once it’s in the chain. Additionally, all parties who are permitted to access the ledger are privy to the same information about the transactions in the chain. The transactions are automatically validated – and corrected, if errors arise – by consensus across the network.
IBM’s Institute for Business Value found in a recent survey 15 percent of banks expect to have blockchains in commercial production in 2017. These “trailblazers” are focusing their blockchain efforts in the areas of consumer lending, retail payments and reference data, IBM said.
Several banks and payment networks have announced investments and projects to test private, limited-access blockchains. In September 2015, San Francisco-based tech firm Chain announced it had raised $30 million in equity funding from a group of companies that included Visa, Citi Ventures, Capital One and Nasdaq. Chase is testing a private version of the public blockchain Ethereum, and Bank of America is partnering with Microsoft on a blockchain trade finance project.
In addition to its investment in Chain, Visa has announced plans to roll out a new blockchain platform that will enable faster cross-border money transfers between banks.
“Visa continually evaluates technologies of all kinds, especially those that might have the potential to advance digital payments for our clients and their customers,” Visa spokeswoman Aida Hadzibegovic said in an emailed statement. “Blockchain technology is one such innovation emerging in financial services and electronic payments which may have practical applications for Visa’s business.”
Not to be outdone, MasterCard’s research and development division is also exploring and building blockchain assets.
“We’ve filed for more than 30 patents related to blockchain technology and cryptocurrency,” said MasterCard Labs spokeswoman Chaiti Sen.
Even U.S. credit unions are getting in on the action, having launched their own blockchain project called CU Ledger. Rich Meade, chief operating officer of the Credit Union National Association, said the project would gauge whether a shared ledger can enhance credit unions’ security and be large enough to be meaningful.
“We think the answer to both is ‘yes,’ but we need to prove that out first,” Meade said.
management into the 21st century
In a recent case study, blockchain web solutions provider BlockCypher noted that while loyalty and rewards points are critical to retaining credit card users, those systems are slow and provide a “suboptimal reward redemption experience.” BlockCypher head of growth Karen Hsu said her firm is currently working with an undisclosed major credit card company to modernize the way it manages rewards.
“Rewards management systems by nature today are antiquated,” Hsu said. “They were started years ago, and so doing simple things like transferring points is really hard.”
Hsu explained that many issuers still manage their rewards on mainframe systems, which are not equipped to handle real-time transactions. Managing rewards with blockchain technology, however, can enable credit card users to quickly transfer their points between partners or recoup points used for trips that end up getting canceled, she said.
Amit Chopra, business development leader for banking and financial services at consulting firm Synechron, illustrated how blockchain technology could allow for interoperability of loyalty points between banks, credit card issuers and an array of other businesses.
“For example, let’s consider that United Airlines’ MileagePlus program and MasterCard/Dick’s Sporting Goods’ Rewards of Sport program were to be on a blockchain for loyalty points,” Chopra said. “The blockchain can bring together these two very disparate programs that run in silo and facilitate an ‘exchange’ for the United points with tickets to a sporting event, assuming the tickets are available in the Dick’s Sporting Goods program.”
Chopra added that loyalty points from a restaurant could be used to pay for a health care expense if both the restaurant and the health care provider were on the same blockchain for points.
Chain Product Lead Clint Gilliam said blockchain could even allow people to tip each other over the internet and social media with their own loyalty points. For example, you could show gratitude to the author of a thought-provoking or entertaining online article or Facebook post by sending him some rewards.
“The market has shown there’s a desire to tip people something of value,” Gilliam said. “That’s missing from our digital world. People are often comfortable using something a little less tangible than dollars.”
Blockchain as fraud
Rewards have become a big target for fraudsters. Last year, a study by Connexions Loyalty found that 72 percent of loyalty program managers had experienced issues related to fraud. Credit card companies can use blockchain technology to analyze patterns of fraud and stop rewards thieves in their tracks, Hsu said.
“We’ve helped the Department of Homeland Security analyze and track all the money movement patterns on the bitcoin network,” she said. “We can do that same kind of analysis on any private chain that the credit card companies, banks or other financial institutions would use.”
Gilliam, however, believes blockchain will be more useful in preventing cyberattacks against banks rather than eliminating fraud.
“When a bank is hacked, blockchain makes their system significantly more robust,” he said. “It diminishes the potential downside of an attack by spreading out permissions. No one can go in and affect a past transaction.”
The path forward –
public versus private
Opinions vary on how the financial industry will achieve widespread adoption of blockchain technology – which is likely a few years away. Chain’s Gilliam said the fact that the public blockchain, which underpins bitcoin, is not permission-based limits its viability due to security and customer privacy concerns.
“Our view is that private blockchains are probably the path forward,” Gilliam said. “When it comes to the financial industry, their requirements really demand permissions, and then you simply need to build them with interoperability. That’s something we work heavily on.”
Others believe the private blockchains being built now are preparing the industry for a gradual move to the public network.
“When I talk to banks and other payment processors, they say for payments to work on the blockchain in the long run – for all this to really make sense – we will need to use the public blockchain,” BlockCypher’s Hsu said. “It’s going to take time to get there because the regulators and the banks have to agree on how to do business together. Eventually we’ll get there.”
Time will tell if the current flurry of investment and experimentation drives a move toward the public ledger system or a network of interlocking private blockchains. Credit card users could stand to reap the benefits if banks, issuers and payment networks can achieve consensus – a quality that is, after all, critical to the success of the blockchain concept.
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