By Shawn Conahan, Chief Revenue Officer, Wildfire Systems
Fiat currency is issued by a government and not backed by a physical commodity. A non-fiat currency is any currency which is not backed by the promise of a government. And, boy, are they valuable.
Remember back in 2020 when the airlines had to offer up their loyalty programs as collateral to secure loans to stay afloat? Back then, the Financial Times found that investors assigned greater value to the airlines’ points programs than the total value of the airlines themselves. United Airlines had a market cap at the time of about $10.6 billion, but their MileagePlus program was valued at $22 billion. That means investors believe the core business of the airline is worth less than zero. Ouch.
However, there is a silver lining: that $22 billion in value was issued to United customers as points they can use as a secondary currency to buy flights, upgrades, or even services not associated with the airline such as car rentals and other perks in the ever-growing points economy. The best thing about airline points is that the airlines can devalue that currency at whim. One could argue from a monetary point of view that it is better to be an airline than it is to be a country.
Here is my consumer take: last year I would have made Executive Platinum based entirely on my spend without flying a single segment on American Airlines. Am I loyal to AA or am I loyal to my Citi AAdvantage credit card? (In my case both, but you get the gist – the points I earn and burn inside that ecosystem lock me in, and I am happy about it.)
Changing the loyalty paradigm in financial services
We have long thought of loyalty in the financial services industry as being as close to the payment tender as possible, rewarding consumers with 1% or 2% cash back when they swipe their cards. But those programs, as valuable as they are to consumers, have become commoditized. It is no longer a differentiated loyalty product, and it does not lock a consumer to a particular card, in fact, it’s quite the opposite. Many consumers collect multiple reward cards and spread their spend across them depending on the scenario. One may be good for gas and groceries, while another may be better for paying the rent.
The financial institutions that are leading the way in customer loyalty have figured out one very important concept: the creative application of their non-fiat currency is a competitive differentiator that should be looked at as far more valuable than just a simple reward program. Take Royal Bank of Canada (RBC), for example. RBC is a dominant force in Canada, and their newly relaunched Avion Rewards program is a shining example of how to treat customers right. RBC gives consumers great flexibility to earn Avion points through multiple consumer touchpoints including their shopping portal and browser extension that rewards consumers with cash back when they shop online. They also offer consumers numerous ways to burn those points, either as cash back or through various partners they may have privileged agreements with.
One could easily imagine a future when RBC decides to make Avion points more valuable than dollars by giving consumers a discount on purchases made with points. After all, we see this today at nearly every restaurant but in reverse. The cash price is lower than the credit price, because when customers use cash, the restaurant doesn’t have to pay the swipe fee to the network. For the RBC consumer, this would start a flywheel of intense loyalty as they seek out ways to acquire points that are worth more than dollars so they can spend them most efficiently. Eventually, this would create tender preference, and RBC’s competitors would be potentially crushed into dust because they lack this massively differentiated consumer benefit.
We are seeing this across the financial services landscape. The links on the value chain are shifting as networks and issuers face regulatory pressure, startup fintechs gain a foothold, and closed-loop payment systems become a reality (if not yet at scale). Add to the mix never-before-imagined competitors like mobile phone makers that come out of nowhere to take their share of the pie.
In the not-too-distant future, what is going to make a consumer loyal to their bank or issuer? There may be many approaches FIs can take, but surely chief among them must be a secondary currency that spends like cash but is even more valuable. Such a currency might buy the complicity of consumers to participate happily in the lock-in that such a program represents because nothing says “I love you” like free money.
Disclosure: RBC is a Wildfire Systems’ client.
About the author
Shawn Conahan is currently Chief Revenue Officer at Wildfire Systems, where he develops strategic partnerships with major finance, banking, and fintech companies to enable the creation of new revenue streams and modernizing their customer experience to position them competitively for the future of banking and money. He has been an entrepreneur, senior executive and investor in the wireless, technology and Internet industries for over 15 years, having previously built and sold three companies. His industry experience ranges from digital media to wireless technology to big data where the common thread has been building platforms with broad applicability.
