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Breaking out of Closed-Loop Loyalty

Why Open-Loop Programs are the Future of Customer Retention

In recent years, industries across the board, from retail to travel to banking, have jumped on the loyalty program bandwagon, keen to incentivize customers, increase engagement and foster brand-to-customer relations. Given that recent studies have shown that 57% of consumers spend more on brands to which they are loyal, and 73% of consumers are more likely to recommend brands with good loyalty programs, this is certainly good business! But could it be even better?

In this article, the first in a series dedicated to the future of the loyalty industry, we will explore the opportunities and advantages of open-loop loyalty programs versus legacy closed-loop solutions.

The story so far…

Traditionally, loyalty programs operate in a closed-loop environment, meaning that loyalty assets can only be redeemed internally within the brand’s outlets, or externally through complex integrations between brands, using vouchers, coupons, gift cards, and other outdated methods.

Closed-loop programs are certainly a tried and tested way of encouraging customer loyalty. The first mention of such a program is from as long ago as 1793, when a group of U.S. merchants started giving out post-purchase copper tokens that could be collected and exchanged for items in their store.

Over the years, closed-loop solutions have become popular as the main means of earning and redeeming loyalty across different industries, to the point that the global loyalty management market is projected to grow from $5.57 billion in 2022 to $24.44 billion by 2029.

Drawbacks of staying closed

Despite the longevity and seeming popularity of closed-loop schemes, as consumers become more sophisticated and demand new, more compelling services with up-to-date payment experiences, the idea of being limited to redeeming loyalty assets at just a few selected locations, using outdated payment experience, is a major drawback. Often, consumers can’t even find anything they want to redeem their points for – hence the more than $100 billion worth of loyalty points sitting unredeemed, worldwide. The customer experience is further complicated by a cumbersome redemption process through which various voucher codes or special barcodes are required simply to use loyalty assets at the till.

If customers can’t redeem the points easily on goods or services that they really want or need, what does it matter to them how many they accumulate? Suddenly, the loyalty program doesn’t seem so attractive anymore…

However, constrained by legacy technology and regulatory restrictions, the only way for a brand to expand its loyalty program – and with it, its customer appeal – has been to establish direct communication and integration between billing and loyalty systems for each and every merchant and point-of-sale system they want to bring into the loop – a time-consuming and cost-prohibitive process.

Open-loop – a win/win proposition

In a recent survey by “The Wise Marketer”, 41% of respondents stated that flexibility to choose is one of the most important aspects of any loyalty program, leading to the conclusion that “members covet choice – not what you want to offer, but what they want to redeem”. This is the basic premise of a truly open-loop program; customers can redeem their loyalty assets at any brand or store, anywhere in the world – a very attractive proposition that undoubtedly leads to greater engagement and participation.

Those who really want to stand out in the red ocean of loyalty programs, and meet growing customer demand for greater flexibility, should consider moving towards a much more flexible, agile and easy-to-manage open-loop loyalty solution, which enables brands to expand the reach of their loyalty scheme to include any merchant or online shop, across brands, companies, and geographies.

Such an open-loop approach has mainly been reserved for credit card networks, rewarding customers for their hard currency financial transactions, and to a lesser extent, for loyalty-like credit card programs, such as points and stars directly attributed to credit card spending, while remaining off limits to core loyalty club activities. Until now.

The first step forward

There is good news for brands looking to revamp their loyalty proposition by adopting an open-loop model that offers redemption everywhere, all at once. An innovative technological solution from CoinBridge by Nayax(please embed link https://coinbridge.com/?utm_source=LoyaltyMagazine&utm_medium=closed_loop&utm_campaign=ILA) enables retailers, for the first time, to implement a truly and completely open redemption solution, with no merchant integration at all, complex financial settlement processes, or regulatory hassles – and in record time.

Furthermore, it provides the key to boosting customer loyalty, and engagement by offering an easy and convenient loyalty payment and redemption experience, everything looks rosy from the brand’s perspective too. Open-loop programs facilitate rapid network growth, new redemption models, and innovative financial services. Moreover, the best open-loop solutions also allow for greater control over consumer spending policies as well as providing access to invaluable data and insights into customer behavior, not only for the issuing brand, but far beyond. This can help companies better understand their customers and tailor their marketing, loyalty program, and business development strategies accordingly. 

In the next article, we’ll explore how merging the worlds of loyalty and payments is set to cause a paradigm change in the industry, making open-loop redemption the future of customer retention.


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