At the end of the 14th century, the Italian Renaissance began as an artistic movement with profound scientific, political, economic and philosophical repercussions until the 17th century. In 2021, non-fungible tokens spurred a digital renaissance that gave artists a new canvas on which to express themselves. It remains to be seen whether this movement will be able to affect other sectors, such as financial services.
Simply put, an NFT is a unique digital asset living on a blockchain. It is defined by attributes in the form of code and metadata. Use cases for NFT are not limited to digital or physical art, but can also cover identification, property rights and securitization. Nevertheless, few NFT use cases involve bank loyalty programs.
In the first quarter of 2022, NFT transaction volumes increased by 200% year-on-year, following a 21,000% increase in 2021. This suggests that NFT projects – such as CryptoPunks – are entering the mainstream. Additionally, companies such as Adidas and Visa engage with and support the NFT community. After irrational exuberance slowly left the market in the first half of 2022banks should start exploring this new technology, building sustainable use cases and engaging customers more actively.
Banks have used points and miles systems to build customer loyalty, create brand awareness and facilitate customer segmentation. These products have enabled banks to maintain privileged relationships with their most profitable customers. NFTs go further by allowing their issuers and creators to create exclusive communities, which can complement credit card products.
Digital collectibles can be added to existing loyalty programs. They create deeper relationships between the customer and the brand, as customers may own a rare digital asset that is closely tied to the bank. Additionally, NFTs enhance personalization initiatives as they can be tailored to meet individual customer preferences. For example, a digital artwork with Post-Impressionist inspirations might be gifted to an avid collector of Vincent van Gogh, while Burberry-branded gaming accessories might be gifted to a shopper with a passion for clothing.
NFTs offer new ways to reward customers for good saving and borrowing practices. They also enable banks to create exciting new digital experiences. Additional benefits of NFTs include traceability, managed transparency, and security. Each digital asset is easily traceable as it is linked to an owner on the chain. Transparency promotes trust because blockchains provide a common ledger for all participants to verify transactions and ownership information. However, complete transparency is not always desirable. Banks should therefore carefully consider their readiness for public vs. permissioned blockchains.. Finally, the underlying consensus mechanism and technological maturity are key determinants of blockchain security and should not be overlooked.
How to use NFT in loyalty programs? First, teams must define the NFT strategy. This involves clarifying the objectives, target audience and distribution of NFTs. Do programs want to reward existing customers by releasing rare digital tokens? Are they aiming to expand the customer base to Web 3 digital natives and diversify assets into crypto-assets? Will they offer these NFTs to a small user base as a token of appreciation or sell them to a larger audience? Will customers be able to sell their NFTs on a secondary market or keep them in a digital vault?
Next, teams must determine the benefits to the customer of holding, rather than selling, the NFT. For example, will it give them access to airport lounges like some credit cards?
Will “super rare” NFTs allow holders to attend exclusive wealth management conferences and provide companies with new opportunities to cross-sell new products? Will they open the doors to private virtual rooms and social media groups of crypto enthusiasts?
Loyalty program teams then need to work with a crypto-native team to translate the strategy into code. Operations must be carefully planned. Teams must be ready to help customers on launch day. In parallel, legal and accounting teams should consult specialist digital asset advisors. Finally, the underlying blockchain and smart contract language should be selected after an overall strategy is in place.
Building a strong NFT community will increase customer loyalty and could improve customer experience by introducing a new way to reach customers online. It is therefore essential to constantly engage NFT holders through professional and non-professional events. Some companies are also experimenting with gamification methods like treasure hunts and puzzles.
For instance, the VeeFriends collection, created by Belarusian-American entrepreneur Gary Vaynerchuk, is an example of how to deliver lasting value with digital goods. A VeeFriend NFT includes a three-year pass to VeeCon, an exclusive conference, for its holder.
While the digital arts may have become saturated, NFTs are “blue oceans” for financial institutions. A small number of established institutions in the luxury industry have experimented in this emerging sector. Some have been successful and are renewing strategic collaborations with their communities.
Nevertheless, very few financial institutions have decided to go ahead with NFT initiatives. Visa stands out in particular with its takeover of CryptoPunk and the launch of its NFT creator program. It’s akin to an accelerator program for artists, musicians, fashion designers, and filmmakers who leverage NFTs in their businesses. It is also a testament to their support for the NFT industry. In this regard, it recalls the way the House of Medici commissioned works of art in Florence during the early Renaissance.
Will banks and other financial institutions step up and deploy capital to drive this new digital renaissance? We’ll see. Top-tier financial institutions – such as Standard Chartered, HSBC, DBS and JP Morgan – have already moved into the metaverse. They all bought land in Sandbox, a leading decentralized game, to experiment with Web 3 and create new experiences for their customers. Offering NFTs to their clients could boost their asset management and custodial business with retail clients, while providing them with the opportunity to have complete ownership of the digital collectible in a non-custodial wallet.
Olivier Truquet is Head of Distributed Ledger Technology for Asia-Pacific at GFT.