Mercado Libre, Latin America’s e-commerce giant, recently announced that it will launch an Ethereum-based rewards token, MercadoCoin. Why is Mercado Libre powering its rewards with blockchain? And how can MELI Coin and other rewards tokens benefit non-crypto-native customers?

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In this article, we’ll discuss how blockchain technology is changing the rewards game, helping businesses to administer smoother, more delightful rewards experiences. In short, the future of rewards is tokenized.

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The Landscape (and Limitations) of Loyalty Rewards

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Though the technology underlying MELI Coin - blockchain - is new to many consumers, the goals of the MELI rewards program are nothing new. Done right, rewards can inspire customer loyalty and incentivize the use of a company’s products. According to Deloitte's Center for Financial Services, 80% of consumers say they prefer banks that offer rewards, and another 66% of consumers say they modify their spending to maximize rewards, as the Bond Loyalty Report shows.

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But for customers, rewards aren’t always rewarding

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Done wrong, however, rewards programs can frustrate customers, rather than delight them. Persistent pain points for customers include:

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• Confusing rewards structures: According to a NextAdvisor study, some 54% of Americans find frequent flyer programs confusing, and 45% said they were confused about their credit card rewards.

• Limited utility: Many rewards programs fail to clearly communicate the benefits and opportunities that their points unlock, leaving customers confused - not excited - about what to do with their rewards earnings.

• Arbitrary rule changes: Rewards programs often overpromise and then retroactively devalue their rewards to remain solvent. During the COVID-19 pandemic, for example, many airline reward programs significantly devalued their points, leading to customer frustration.

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For companies, rewards management is a pain.

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Rewards programs can also be a headache for the businesses that manage them, with notable challenges including:  

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• Fraud management: Preventing fraudulent rewards issuance is a key concern for any rewards program manager. According to Structured Finance Magazine, up to 70% of loyalty programs have been affected by fraud.

• Partner integrations: Many loyalty programs partner with other merchants to allow customers to earn and redeem rewards at more locations. However, reconciling rewards points across multiple ecosystem partners can be a logistical nightmare.  In airline loyalty programs, for example, miles earned from alliance partners can take up to 30 days to credit to customer accounts

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Tokenized rewards can smoothen over many of these points of friction, creating more value for customers and businesses alike.

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The Future of Rewards is Tokenized

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In a monetary system, blockchain technology enables “programmable money,” with the issuance and tracking of currency units facilitated by smart contracts. In customer rewards, blockchain can enable  “programmable rewards,” yielding efficiency benefits for businesses and leading to a smoother customer experience.

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Traditional rewards make use of a single, private ledger managed by the issuing organization. These ledgers often require manual reconciliation and upkeep, especially when a rewards program includes external partners.

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In contrast, tokenized rewards are issued on a blockchain, with issuance and reconciliation proceeding according to the blockchain’s rules and smart contracts.

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Tokenized rewards unlock a richer customer experience

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For customers, tokenization unlocks a best-in-class rewards experience, enabling the following benefits:

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• Near-instant rewards crediting: Always-on smart contracts can securely automate rewards issuance upon the completion of predetermined requirements (e.g., customer expenditures).

• Security and transparency: In traditional rewards programs, customers can see their points devalued (or even removed) via arbitrary program decisions. Tokenized rewards, in contrast, are governed by transparent smart contracts and owned by customer wallets.  

• Rewards portability: Tokenized rewards can be made highly flexible, tradable, and spendable wherever customers prefer. Customers can redeem their earned rewards within the rewards ecosystem, but can also withdraw them to external wallets.

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Blockchain enables technical rewards management advantages

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From a management standpoint, tokenized rewards create numerous operational efficiencies:

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• Automatic, near-real-time reconciliation: Blockchain-based transactions provide for an always up-to-date record of balances without the need for a centralized clearinghouse.

• Fraud-resistant: Unlike traditional rewards points, each token is issued on the blockchain and therefore easily verifiable. Blockchains are also highly tamper resistant, providing an authoritative record of rewards.

• Unique and trackable: Also unlike traditional rewards points, tokens are trackable from the moment of issuance to the moment of redemption, providing a new, rich dataset for rewards program managers.

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Conclusion

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The blockchain revolution is only beginning, with lots of use cases still to be explored. Customer rewards are a key frontier for blockchain innovation, as many millions of consumers earn tokenized rewards in the coming months.

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In our next article, we’ll discuss how to build a tokenized rewards program for success, as well as where some crypto rewards programs have gone wrong.