Cutting out the middleman

Axel von Goldbeck By Axel von Goldbeck
Uploaded 04 April 2018

Blockchain technology is all about bypassing intermediaries, and is set to have a major impact on hotel distribution and loyalty programs, says Axel von Goldbeck of DWF

Blockchain is … well, hard to say what it actually is. For a growing community of enthusiasts it saves the world from useless intermediaries like banks, real estate broker or governments. For others it is the source of token fraud, money laundering and all other worldly evil. And a still very large crowd doesn't know - or understand - anything about it.

Yet, the main features of blockchain - or distributed ledger technology - need to be understood in order to evaluate its uses. In many cases, conventional database and/or transaction technology will be sufficient or even better suited to fulfil the requirements of a given demand. The special blockchain features come into play when values (or more precise: information about values) of any kind need to be transferred safely and untampered, where information about transactions need to be shared without necessarily disclosing the identity of the parties to such transaction and, finally, where the trust historically conferred by intermediaries can be replaced by the trust regime of the blockchain.

In spite of a number of examples to the contrary, blockchain technology seems to deliver on its promises. Although hacks continue to take place and will remain a constant challenge for every technology, although financial regulators regularly publish warnings with regard to cryptocurrency in general and initial coin offering in particular, the number of applications is growing daily. Even the due warning of regulators and central banks must not be understood as complete rejection of all kinds of use cases. In fact, at the same time many regulators are preparing to adjust and clarify the regulatory framework in order to allow blockchain business models to work on a clear legal basis and comply with anti-money laundering and securities laws. The Swiss regulator FinMA expressly acknowledged the innovative potential of the blockchain.    

Although the technology is very much in its early stages, and many infrastructure issues are still to be solved, blockchain applications are already working their way through various industries, sometimes disruptive, but always innovative. Having started with cryptocurrencies like Bitcoin, blockchain pioneers have targeted financial services, and in particular the venture capital industry. Funding through Initial Coin Offering has reached a peak of US$2.5 billion in 2017, almost five times higher than in 2016.

And the technology is moving on, from the financial sector into more traditional industries. For the hospitality sector the blockchain offer (as of today) has at least two useful fields of application. First of all, hotel companies start putting their inventory on the blockchain thereby trying to solve the various problems with shifting availabilities to where the demand is.

Inventories on the blockchain could also restore what has been lost to travel platforms like Expedia, booking.com and  the like: the direct connection to customers, their data and their needs. Cutting out intermediaries and executing peer-to-peer transactions is the reason for, and the promise of, the blockchain technology. Disrupting the disruptors and destroying the oligopolistic structure of travel platforms could prove to be possible with blockchain technology. In addition, the fees charged by travel platforms of up to 20 per cent of the booking price may be reduced when control over the booking process is regained.

TUI has chosen to set up its own blockchain in order to be able to set the rules for using it. For smaller hospitality companies it may be more advisable to join forces with others. The success of hotel inventories on the blockchain depend, as with platforms, on the number of qualities of offers. For smaller companies services like those of Winding Tree may be preferable, offering a standard blockchain solution.

Putting reward and loyalty programs on the blockchain is the second most promising use case for the hospitality companies. Rewards programs are widely used, produce high costs, have low redemption rates and pose considerable balance sheet risks. Billions of dollars in value are issued annually. One of the big reasons for the low redemption rate is the non-existent transferability of many reward point programs. Apart from the fact, that many companies do not wish such transferability, the technical issues associated with such transferability are of a prohibitive nature for many issuers of reward points. The limitations of reward points to one or very few service and/or goods providers, however, make reward points frequently unattractive for the recipients. For these reasons reward programs still fail to unfold their full potential.

Blockchain technology offers solutions, at least for the technical issues. Public blockchains offer access to many reward point issuers and customers. As the basic technology and APIs are provided by the blockchain provider, the technical issues are easy to solve and cryptographics and verification technology take care of security and double spending issues. 
Companies like Trippki offer a standard token solution that can be customised by the hotel or hotel groups. Such solutions come for the price of control, but they are ready and cheap and are a good testing field for smaller companies.

From a legal point of view the above-mentioned use case are less prone to regulatory pitfalls than other applications. Using the blockchain as listing platform for inventories does not touch on financial regulation, nor should reward programs, if sensibly structured. Thus legal issues should not disturb the implementation of hospitality solutions. 

Many outsiders find it hard to find a way between perceived hype and hubris. This accounts for the wait-and-see position of many traditional companies. And yes, the tech companies still have to deliver. In particular, they have to deliver not only explanations how the technology works, but what the benefits in terms of costs, speed and comfort for each industry and each business model are. However, the number of companies with blockchain projects is growing quickly, the blockchain will not die from a lack of money, and all major industries are exploring the benefits. Those who still want to wait for results will soon have ample illustrations of what works and what does not (yet) work. The examples given above are likely to work in any case. The blockchain is here to stay.

Next month's Boutique and Lifestyle Hotel Summit in London (May 21 and 22) will feature a workshop discussion on the applications of blockchain technology in hospitality. Find out more here.

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