The loyalty business on the Fiat standard
I’ve worked at Mastercard for the past 10 years in their San Francisco office building card-linked offer solutions to increase merchant loyalty. It’s a fascinating business where cardholders receive offers from merchants through their bank that give them a discount when they make a qualifying purchase at participating merchants. Below is an example of a sample of these offers/deals from my personal Wells Fargo bank account.
The offers drive new customer acquisition, re-engage lapsed customers and drive increased spend frequency and basket size of existing customers. Overall, the marketing solution is highly effective in driving incremental spending behavior, primarily through credit card (some debit card) payment channels.
Enter Bitcoin
Bitcoin as a medium of exchange doesn’t get much attention, given that bitcoiners are expected to hodle their bitcoin and there is understandable fear about triggering taxable events from spending, but let’s put those concerns aside for a moment and explore the business opportunity of driving merchant loyalty on bitcoin rails instead of fiat rails. What changes? It’s no exaggeration to say that bitcoin completely transforms the value proposition to deliver an outsized economic surplus never seen before, with efficiencies and use cases that fiat can never match.
Cost
Running a fiat merchant offers program is an expensive undertaking, requiring a significant and complex tech stack and team of people to: legitimize participating merchants, confirm merchant contracts, assign offers to cardholders subject to predicted marketing budgets, detect qualifying spend events, reward cardholders who redeem with statement credits, compile reporting for merchants to demonstrate program effectiveness, and reconcile billings. Most importantly, all consumer spending is driven through the most expensive (to the merchant) payment channel: credit card.
Bitcoin rails eliminate a significant number of steps in this process. Merchants could participate in a model more akin to Google Adwords via a self-service portal that legitimizes itself via the use of bitcoin to fund the marketing budget in real-time (which can also be done away with in real-time – never possible in fiat offering programs). The bank and card processor are no longer involved as gatekeepers in the end-to-end solution; they, and their associated costs/fees, are removed from the value chain altogether. Most importantly, redemption transactions are now all driven on low-cost Lightning Network rails, removing not only the direct costs of credit card fees (typically 3% or higher), but also the indirect costs of chargebacks and fraud.
New paradigms
Fiat rails mean that consumers who participate in their bank’s merchant offer program typically do not receive a notification at the point of sale that they have successfully received their rebate, and the rebate itself does not appear until days later as a statement credit. A bank could invest in a real-time notification offer solution, but this is prohibitively expensive and complex to implement, and must be done on a bank-by-bank basis; very few do, and there is no universal protocol that can be leveraged.
Financing of fiat offers by the seller must be done upfront through pre-financing of a committed budget, or payment is pursued with the typical ’30 day’ credit agreement, backed by contractual obligations.
Bitcoin Rails completely turns these legacy frameworks on their head. Consumers can not only receive notification in real-time at the point of sale when they take advantage of a bitcoin-native offering, to get that visceral peace of mind, but they receive the discount also in real time. Not only that, but ‘split payments’ is supported by technology such as LN Bits and Bolt 12, where the bitcoin-native offer provider/company can also be paid in real time at the same point of sale. This essentially eliminates the fiat ‘invoicing’ step. Merchants can also set the offer values, minimum spend thresholds and most importantly the inventory of remaining offers/discounts (the marketing budget) they are willing to commit to, in real time; such changes are impossible through fiat channels, which require budget allocation weeks in advance. I’m only scratching the surface of the long list of unfair advantages bitcoin brings to the delivery of a merchant offers program, but I’ll leave it at that for now.
Reserved
Reach: An offering program is essentially a two-sided market, and it’s important to have as large an audience of consumers as possible to make merchant participation worthwhile. The Bitcoiner audience, and what I call the “Bitcoin-curious” audience, are still relatively small segments, although they are growing.
Targeting: Fiat merchant offer programs have a silver bullet that is currently not available on bitcoin, at least not directly; consumer transaction history. This history allows the merchant to carefully target their marketing budget to specific consumer segments such as new, lapsed, and loyal groups. This is an invaluable tool to ensure the highest return on ad spend (ROAS) and also allows for insightful before vs. after test vs. control ‘incrementality’ reporting, which proves the marketing campaign spend uplift which is very compelling and useful for merchants who need to justify the spend on the offer campaigns.
That said, I would argue that these concerns are mitigated by the potential for traders to attract the bitcoiner segment, even in a broad and untargeted manner, because the segment is so valuable; it favors wealthy, influential, and fiercely loyal traders who are bitcoiner-friendly. Every trader in their industry/category has the advantage of being first to market, so they can be the first to attract this invaluable segment.
The above is an example of how bitcoin is removing fees from the legacy system like never before, unlocking much higher margins for merchants and providing a more direct, visceral, and satisfying consumer experience. This long list of unfair advantages provided by bitcoin-native merchant offerings cannot be replicated by a competitor operating on fiat rails. This is based on my experience over the last decade working on CLO merchant loyalty programs.
Michael Saylor says, “Buy Bitcoin and wait.” For many of us Bitcoiners, there is an opportunity to not just “wait,” but to proactively help drive hyper-Bitcoinization. I’m taking this step with merchant offerings, where I’m leveraging my expertise and experience to bring Bitcoin-native offerings to life. I’m excited to see what dramatic cost savings and new, unique use cases other Bitcoiners can discover by taking their fiat mining experience and expertise and reimagining it from a Bitcoin perspective.
This is a guest post by John McCabe. The opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.