Wouldn’t it be great if you could open a digital wallet and view the sum total of all your rewards programs for hotels, pharmacies, and bank cards, all in one place, converted into cash? Then, you could spend all those thousands of unused airline miles as dollars to buy an Apple watch or take your spouse to dinner at the corner pizzeria. Loyalty points you don’t even know you have—the average American has more than a dozen rewards programs—are suddenly as spendable as the bucks in your checking account, just by scanning your rewards app at the checkout counter. What’s more, you can even get cash for video game points you could use only to buy, say, a sword to make your team mightier, and trade points for your Bitcoin on the same wallet.
That’s the vision for a new product that Bakkt, a startup backed by Intercontinental Exchange (ICE), is planning to develop 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 Feb. 5, brings the total capitalization for Bakkt, which counts Microsoft and BCG among its investors, to over $1 billion, minting a new digital unicorn.
Bakkt created the first federally regulated cryptocurrency futures exchange in 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 tells Fortune. “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. The major sponsors in the U.S. 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, says Bakkt CEO Mike Blandina, 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.
Bridge2 operates many of America’s largest loyalty redemption sites, which hold a combined total of $60 billion ready-to-go rewards. Those are places you visit to see your airline points, then choose from menus offering travel, electronics, and the like, and click through to purchase a flat-screen TV or reserve at a hotel in Orlando. Bakkt intends to keep building its current business with major sponsors.
Now, Bridge2 is testing a pilot program called Loyalty Pay. It would enable sponsors to issue a digital credit card, carrying the merchant’s brand, that would convert rewards to cash.
“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,” says Bridge2 president Larry Wine.
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.
The idea is to introduce two types of vehicles for paying with points. The first would provide a digital credit card that would be accepted anywhere merchants take Google Pay or Apple Pay. Merchant costs wouldn’t change, and they wouldn’t need to make any adjustments to their point-of-sales terminals. The benefits would go to the folks who can turn sleeping rewards to cash.
It’s the second phase that would disrupt the system—and potentially reap huge savings for merchants. But it would require merchants, like your neighborhood bar, to alter their payments process so they’re linked directly to the Bakkt app. Getting stores onboarded will require a big marketing and persuasion effort. 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. The app would show a pie chart divided into four slices: cash, crypto, rewards, and game points for systems like Microsoft’s Xbox. Folks could not only make purchases with the app using cash or bitcoin but also seamlessly transfer money from one category to another. Bakkt would handle the trading of points for cash, charging users a small fee. Direct payments would cost a tiny fraction of today’s interchange fee.
“It makes sense, because we’re an exchange company,” says Sprecher. The CEO–—who, by the way, just made a bid for eBay–—is a self-described “car nut” who’s not using the rewards garnered from his hobby. “I buy tons of batteries and other stuff from a local auto supply store, and I’ve accumulated all of these points, but I don’t use them,” says Sprecher. The day the CEO can buy dinner by using his auto supply points as cash at a restaurant that accepts direct payment via Bakkt rewards may be the dawn of a revolution in payments.
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