If you’re like me, you’ve got a whole pile of loyalty and affinity cards for hotels, airlines, and stores. That stack’s too thick to fit in my wallet, so I park the plastic in my office drawer, wrapped in a rubber band, and pluck out what’s needed for a flight or shopping excursion. My haphazard adventure in redeeming points also encompasses logging into rewards sites at Chase or Hertz or Starbucks. If I were a millennial, or Gen-X or Gen-Z’er, I might have an online Bitcoin account and another for winnings on Xbox’s Call of Duty: Black Ops Cold War. Keeping track of the passwords is a pain, awards often expire unused, and I’m always getting special offers from Priceline.com for a hotel, say, in Ft. Lauderdale or sales at Whole Foods that come at the wrong time.
What if all of those points, awards, rewards, gift cards, cryptocurrencies and more could be combined into a single digital wallet on your iPhone or android device that’s as easy to use as an online brokerage account? A portfolio that could even include your stocks and bonds? That’s the new product that Bakkt, the fintech unit of trading colossus and NYSE parent Intercontinental Exchange that built a pioneering marketplace in digital currency futures, is launching. Bakkt, whose founding CEO was outgoing U.S. Georgia Senator Kelly Loeffler––her husband is ICE chief Jeff Sprecher––now offers its app to 100,000 customers, and will roll out to all-comers in March. The Bakkt app, for example, lets you use Bitcoin to purchase a TV from Best Buy, or swap Alaska Airlines miles to reload your Starbucks gift card. It displays the estimated value of all those now far-flung awards and cryptocurrencies in dollars, and a click will exchange any of them for cash.
You can use that cash, or exchange points, to buy stuff from Bakkt’s network of 200 merchants. Bakkt charges those retail partners ranging from Home Depot to Subway a fraction of what credit card companies receive for handling the sale. The stores reroute those savings into special deals for Bakkt customers, posted on the app. “Banks, retailers and travel companies have their own sites for redeeming awards,” Bakkt’s new CEO Gavin Michael told Fortune. “This is the first time they’ve been aggregated on a broad platform. We estimate that outstanding rewards total over $1 trillion, yet most people have no idea what their own rewards add up to. The day they get the Bakkt app, they’ll find out, and put what amounts to hordes of hidden dollars to work.”
Though Bakkt is now focused on unlocking rewards for Main Street shoppers, Sprecher has bigger ambitions. He views the lofty costs of processing payments by credit card as one of the prime targets for disruption in financial services. Bakkt, he says, could play a central role in wrestling down costs. As Bakkt attracts more and more retail partners, it will be handling a greater share of all payments in a “closed-loop,” direct wallet-to-store, digital zap that allows retailers to pocket 99.5 cents of what they sell, when they’re receiving just 97 cents on typical credit card sales. “The Bakkt app can expand to all kind of payments,” Sprecher told Fortune. “It can go a long way towards greatly lowering the 3 cents retailers are paying now, freeing up money for more awards and discounts for customers.”
Bakkt reached a milestone in early January when it announced that it will soon go public. That transformation will raise the cash needed to fund development costs as it attracts users, a population it expects to reach a staggering 30 million in five years. The new Bakkt is taking a different course than the one that Loeffler followed when she launched the venture in August of 2018, along with partners such as Starbucks and Microsoft that remain investors. The original goal was to attract mutual funds, ETFs, and big institutional investors to Bitcoin. “Because we’re in the exchange business, we knew investment funds thought they’d find a new customer base by offering Bitcoin,” says Sprecher. Bakkt achieved a big part of its goal by creating an exchange for Bitcoin futures that provided the secure custody and clearing that the digital currency sorely needed to go mainstream. But the “institutional adoption” Loeffler and Sprecher expected mainly didn’t happen.
Instead, it was the everyday consumer who rallied to Bitcoin. As Sprecher explains, “It became apparent that the real interest came from a younger generation much more engaged with apps on their mobile devices. Then we got into the COVID crisis and the institutions focused on other things. We started to say, ”’The consumer will adopt digital assets quickly, institutions’ minds are somewhere else.'” Sprecher and his partners shifted to targeting the generations moving away from cash and credit cards. The product they reckoned offered the broadest appeal: the first digital wallet holding both the cryptocurrencies young folks crave and the rewards that they’ve got plenty of, but are strewn across sundry cards and websites.
In early January, ICE announced that Bakkt’s being absorbed into a special purpose acquisition company (SPAC) sponsored by Chicago investment fund Victory Park Capital. SPACs, by the way, are a model pioneered by Sprecher. As part of that deal to go public, Bakkt will raise an additional $532 million to bankroll future development, including a $50 million contribution from ICE, which will own 65% of the new Bakkt Holdings, but own a minority of the voting shares. The public will purchase 8% of the shares. ICE and its partners estimate Bakkt’s enterprise value following its debut on the NYSE, expected in the second quarter, at $2.1 billion.
While most people think of digital assets as cryptocurrencies, Bakkt takes a much broader view. “We define digital assets as any store of value that can be traded or exchanged,” says Michael. “Bakkt made Bitcoin much easier to trade, and now we’re making what will be trillions in rewards, which were barely traded at all, as a currency that can be freely exchanged.”
Let’s look at a user’s typical day on the Bakkt App, as gleaned from an example of the company’s website. We’ll call the customer Digital Dave. Our Dave starts with a balance of $10,466 divided into four holdings, all shown in a pie chart on the opening “Portfolio” page: $4900 in rewards, $3000 in cryptocurrencies, $2000 in In-Game winnings, and $500 in cash. The $500 just arrived via a transfer from the client’s checking account at Chase. Three days before, Dave bought 0.023 Bitcoin tokens for $623. ICE handled the trade on its Bitcoin Monthly Futures platform on the ICE Futures U.S. exchange. Dave’s Bitcoin is held in “deep storage” custody at Bank of New York Mellon. “That Bitcoin trade happens behind the scenes, in ICE’s engine room,” says Michael. “To the customer, it looks like he or she is selling stock for cash.” The app has a page tracking the Bitcoin exchange rate, which is currently $32,000.
Dave then adds to his stash of 1,500 V-Bucks, Fortnite’s In-Game currency for purchases. He buys 20 more, at a conversion rate of $1 each, for $20 in cash. He’s accumulating V-Bucks to grab special deals at Target.
Dave wants to stop at Starbucks for an afternoon coffee, so he converts 150 of his 3000 Chase Ultimate Rewards points (cash value: around $1500) into 500 Starbucks Stars. He’s also got the option of reloading his Starbucks card using Bitcoin. He then trades another 1,800 Chase points for Apple AirPods, charging case included. Bakkt is able to put the points, miles and other rewards into estimated dollars, because it’s established conversion formulas with such sponsors as Starbucks, Apple and Xbox. Dave also holds investments at BlackRock in his wallet. In the near future, Bakkt wants to enable him to buy and sell mutual funds and trade stocks and bonds on the Bakkt App.
Bakkt generates revenue by charging 2% on Bitcoin trades, redemptions of points for cash, and awards bartered for other awards. Bakkt’s deals with retailers require that they channel part of the savings into special rewards and offers reserved for its clients. Its corporate partners also get lots of data that can guide them to targeting Bakkt subscribers who are likely to be interested in their offerings. Bakkt posits that they can convert browsing to sales at much high rate than on most consumer apps. For example, if a hotel company sees that Dave is trading its points to JetBlue for flights to Ft. Lauderdale, it can send him promos for hotel deals at sunny resort city. And it may be able to offer special discounts because it’s saving so much versus getting paid via credit card.
Few figures in financial services think bigger than Sprecher. And he’s convinced that Bakkt is poised to take a huge share of one of the world’s fastest-growing new markets. In Bakkt’s public filings, it forecasts that the combined market for cryptocurrencies, gift cards, loyalty points and In-Game assets will jump from $1.6 trillion in 2020 to over $5 trillion in 2025, waxing at a 25% year rate, with gift cards and rewards doubling to $2 trillion. Right now, Bakkt is losing money. In 2021, it projects an operating deficit of $204 million on $889 million in sales. But from there, its forecast calls for jack rabbit growth. Its filings predict that sales will explode more than seven-fold by 2025 to $6.6 billion.
Sprecher made a dizzying pivot from striving to make Bitcoin a common currency on Wall Street to inventing digital wallets that swaps V-Bucks for Starbucks. You never know, but this trade looks like a winner.
