Photo: Joe Loong/Flickr
Everyone likes getting something for nothing, which is why 74% of U.S. adults participate in customer loyalty programs like those offered by credit card companies, hotel chains, and retailers.If they’re racking up charges anyway, why not get rewarded for it?
The problem is many of those accumulated reward points sit unused because cardholders don’t necessarily want the goods offered by the programs.
According to data from rewards research company Colloquy, the value of rewards miles issued in the U.S. last year was $48 billion, of which almost $16 billion went unused.
That means the average U.S. household active in a rewards program earns $622 in points per year, but fails to “cash in” one-third of it, or more than $200.
But consumers will soon have a new way to get “free” stuff, and this time it is not just another hotel room stay, airline flight, or toaster oven.
Members of rewards programs will be able to exchange points for shares of the sponsoring company. That’s right, points for stock.
The new program, launched by LoyaltyShares under the name Loyalty Equity Acquisition Program (LEAP), allows companies to add their publicly traded stock as an award redemption option in existing point programs.
In the first week after the product launched last month, a total of 600 companies expressed interest. Of those, the most likely early adopters are two major financial services firms, hotel chains and a handful of consumer retail brands.
The companies did not want to be named because they have not yet rolled out the program. To do so, they would likely need to set up direct stock purchase plans, much like the ones many businesses have for employees, and establish the specific exchange rate for turning points into shares.
For companies, the benefits are clear. Businesses have long been searching for ways to convert top-end customers into shareholders — what might be called the highest form of loyalty. “Insofar as this idea takes the customer from consumer and elevates them into the second role as a shareholder, it is a nice combination and will likely help build a stronger long-term relationship between customer and company,” says Jim Sullivan, a partner at Colloquy.
But the benefits extend beyond just boosting loyalty. As Paul Hebert, a principal in LoyaltyShares, explains, there are also advantages relating to a company’s balance sheet. Under existing accounting rules, unredeemed points are considered a liability and thus a company must maintain a cash reserve for unredeemed points.
Exchanging some of those points for stock enables a sponsor company to transform its debt reserve into equity. This can have significant positive impacts to the overall financial statements – something all companies are searching for, especially in the current economic environment.
At the same time, the points-to-shares plans could have real upside for consumers. For one thing, stocks can increase in value, unlike, say, that toaster or camera. “This has created the opportunity to not just spend but also to save and reward participants by giving them the opportunity to participate in the growth of the company,” says Henry Montag, principal at Financial Forums and a financial advisor for over 20 years.
With markets in turmoil and many individuals looking for new ways to make money, the ability to turn something of limited value into an asset that can appreciate over time has obvious appeal – though the ultimate value of such a program would depend at least in part on the specific exchange rates involved.
Of course, the converse is also true. With the equity markets so volatile, putting your points toward purchasing shares could be risky, especially if you’re one of those road warriors who has amassed a huge number of rewards. Instead of an iPad, you could wind up with a stock loss (though there might be tax advantages).
Sullivan questions whether many users will be able to take advantage of such a program. Many participants may not have enough miles to trade in for stock, or not enough to get more than a few shares. Low balances in any one program are part of the reason many miles now go unused. “There will be a few dollars here, a few there,” Sullivan says. “It is not $200 all in the one program, so it may be that many people never have enough in one program to actually redeem in a program like this.”
What everyone seems to agree on is that a plan like LEAP is most likely to be effective at the higher end of the market, with the “road warriors” and avid customers who have hundreds of thousands of points. “This segment of super users are likely already accustomed to buying and selling shares and are in a place to take advantage of such a program,” explains Montag.