February 6, 2020
Wouldn’t it be great if you could open a digital wallet and view the sum total of all your rewards programs for hotels, airlines, retailers, pharmacies, and bankcards—all in one place, converted into cash?
What’s more, using the same wallet, you could trade cash for video game points that previously you might only have been able to use to buy, say, a sword—or you could trade points for your Bitcoin.
Formed in August 2018 by the Intercontinental Exchange (ICE)—an operator of global exchanges, clearing houses, and data and listings services—Bakkt intends to do just that, according to a report by Fortune Magazine.
And the company announced this week that it will realize its vision by purchasing a specialist that handles rewards redemptions for America’s biggest sponsors, Bridge2 Solutions of Atlanta.
The deal—announced before the market opened on February 5, Fortune notes—rings the total capitalization for Bakkt, which counts Microsoft and BCB among its investors, to over $1 billion, minting a new digital unicorn.
Bakkt created the first federally regulated cryptocurrency futures exchange in New York last September—a platform that enables institutions to trade Bitcoin on the ICE U.S. Futures market.
But Jeff Sprecher, ICE’s founder and CEO, has always pursued the ultimate goal of transforming the complex payment system requiring merchants to send between 2% and 3% of all purchases to banks, credit card companies, and other intermediaries.
“The legacy payments infrastructure is ripe for disintermediation,” Sprecher told Fortune in an itnerview. “The Internet should make it possible to create a direct payment system that doesn’t use a third-party set of rails. It hit us that making rewards cash-like would be a step in that direction.”
The Bakkt plan addresses a pressing need for the sponsors of big corporate rewards plans, dominated by hotels, airlines, and banks: These companies often have billions of dollars in liabilities sitting on their balance sheets in the form of unused points, Fortune says.
In fact, the major sponsors in the United States, alone, are sitting on a cache valued at $160 billion. In today’s strong economy, travelers are using their airline rewards points at a relatively low rate. But if the economy turns down, consumers could start cashing in heavily, causing a sudden rush of losses for the carriers. Today, points turn over on average at the extremely slow pace of around 30% a year.
According to the Bakkt team, the CFOs they have spoken to are looking for a platform that enables them to better smooth the rates of redemption by offering to purchase points in a marketplace. Companies will offer customers varying dollars per point based mostly on how likely someone is to cash in. If a frequent business traveler uses around 90% of his or her rewards, the airline might pay 2.5 cents a point; if it’s someone who flies from New Jersey to Florida once a year, but yet has lots of points, the airline might pay 1.5 cents.
The market should work, Bakkt CEO Mike Blandina told Fortune, because the sponsors will have the flexibility of setting the price. “Companies are always interested in buying back points at the right price,” says Blandina.
“If you’re at LaGuardia Airport, you could use the card on your iPhone to buy dinner at a restaurant before catching a flight, in cash, or buy perfume in the duty-free shop,” Bridge2 President Larry Wine told Fortune.
According to Bridge2, Loyalty Pay is finding broad acceptance among sponsors and should launch in the next few months, demonstrating willingness on the sponsor side to turn points into currency. But advancing to the product that gathers all rewards in a single wallet, and translates everything to cash, will take longer, though Bakkt isn’t offering a timetable.
Bakkt’s challenge is to show merchants how they can use their savings from going direct—instead of paying the interchange fee of around 2.5% that goes to banks, credit card companies, and the like—to lower prices or provide their own rewards to customers. The numbers are in Bakkt’s favor. What’s unclear is whether retailers are willing to scrap a system that’s been reliable, though expensive, for decades.
Whatever the outcome, the ultimate goal has loads of appeal to those who have sacrificed unused points or can’t buy what they want with the rewards they’ve accumulated.
Research contact: @FortuneMagazine