IBM and UnionPay collaborate on blockchain project for exchanging bank loyalty points

IBM China Research Lab and China UnionPay’s E-payment Research Institute recently demonstrated a collaborative blockchain project at the Shanghai International Blockchain Week. The project enables banks to integrate and share bonus point systems, while consumers will be able to exchange points from any of the banks they do business with.

"The combination of blockchain technology and expertise from IBM coupled with an innovative business approach by China UnionPay in the payment industry has resulted in a significant first of a kind demonstration of blockchain technology in the financial payments industry.”
— – Dr. Shen Xiaowei, China IBM Research Director and CTO of IBM Greater China Group

Established in 2002 and headquartered in Shanghai, China UnionPay is the national bankcard association in China, operating under the approval of the People’s Bank of China (PBOC). It provides bank card services and a major card scheme. Retail Banking Research (RBR) revealed UnionPay surpassed Visa in 2015, taking the top spot in the $21.6 trillion global cards market.

“Despite its rapid recent expansion, increases in UnionPay’s share will be more gradual going forward as a result of slowing growth in its home market,” states RBR. The company’s research shows that UnionPay only has a market share of 0.5% in expenditure outside of China, whereas Visa has 50% and MasterCard has 31%. The card is accepted in 160 countries and regions, including the United States. In addition, UnionPay’s monopoly on domestic bank card clearing ended when the Chinese market opened up to foreign participants, in June 2015.

“UnionPay has accelerated the expansion of oversea acceptance network to make it more convenient for Chinese people to use UnionPay cards in a foreign country,” says China UnionPay President, XU Luode. “At the same time, we also provide services to UnionPay cardholders in other countries and regions.”

Financial service providers typically use reward programs to promote certain business objectives, such as generating new accounts or incentivizing the use of a bank credit or debit card. Points can be awarded for cash back, travel rewards and other perks with everyday purchases. UnionPay cards provide value-added services including bonus points, exclusive discounts and airport privileges.

"As a new industry pilot for blockchain technology, this represents a significant business breakthrough and innovation milestone for the electronic payment business.”
— – He Shuo, UnionPay Director

MasterCard claimed that these programs are “a viable means of fostering and deepening customer engagement,” in a whitepaper the company published a in 2013. The card provider and financial services company revealed that customers in reward programs spend almost three times more, banks earn a two fold return on a return original program investment, and “a near 100 percent retention rate” among program participants.

However, a November 2015 report by Experian Plc revealed that “loyalty to a financial brand is a tough sell.” Their survey found that 46 percent of millennials look for new financial institutions that better fit their needs, and three out of four would switch to a better alternative. In addition, 43 percent of respondents would switch for “better reward programs.” Millennials, which are those aged 18-34, now represent the largest living generation in the U.S., according to the Census Bureau’s population estimates released in April.

KPMG describes this shifting demographic as “the millennial time bomb.” The company’s 2016 Banking Sector Briefing states that millennials believe they will not need “traditional banks” at all in a few years, their needs will be serviced by specialist digital app providers. “We therefore need to be clear on what banking means to millennials,” states the report. “They want to deal with a different type of bank, one that understands how banking can be delivered through digital, mobile technology.”

“With millennials predicted to account for one third of all spending by 2020, winning the loyalty of them now is crucial to future success. Those that do not embark on bold, decisive transformation today risk sleepwalking into irrelevance.”
— – KPMG

While banks have been aware of the shifting tide in technological expectations, the seemingly simple task of enabling banks to integrate and share bonus point systems can be a challenging and expensive task using conventional technology. However, the research efforts between UnionPay and IBM Research have demonstrated that the successful exchange of bonus points among banks can be done using blockchain technology.

“This pilot along with similar innovations underway using blockchain will positively change the future of the finance industry," claims He Shuo, China UnionPay Electronic Payment Research Institute Director. According to the announcement, the platform will integrate online and offline channels.If the demonstration makes it to market, UnionPay card holders could go to any retailer with point-of-service (POS) devices and use their reward points.

The project is built on IBM’s permissioned blockchain using Hyperledger technology. “IBM is partnering with the Hyperledger Project to build an open source, enterprise-grade blockchain platform and is helping clients define and develop more industry use cases," says Dr. Shen Xiaowei, China IBM Research Director and CTO of IBM Greater China Group. "In time, we expect this to result in widespread adoption of permissioned blockchain networks to solve a number of business challenges.”

While blockchain based loyalty systems have been around since at least 2014, none have announced the ability to exchange reward points between banks.

New York-based Loyyal, formerly Ribbit Rewards, announced a test with partner Deloitte to integrate their blockchain-based rewards program with the big-four professional services firm in 2014. Loyyal has also partnered with the Hyperledger Project. In May, the company was selected by the Dubai Future Foundation to develop a new repeat tourism incentivization program called Dubai Points.

In February, The Royal Bank of Canada (RBC) announced that it was working with Ripple on a blockchain-based loyalty platform. Capgemini partnered with ascribe GmbH to place a rewards program on a blockchain last May.

Most recently, Bitscan launched a new platform called Incent. Described as a currency for loyalty programmes, the currency and platform aims to make rewards points as easy to spend as cash. The company is running a crowdfunding campaign to spur adoption, starting on Oct 1.