Affinity Capital Exchange is launching an exchange allowing hotels, airlines, banks, and hedge funds to trade loyalty points that have been packaged into “point-backed securities”.
The move comes as the hotel sector places ever-greater weight on loyalty programmes, while also seeking to make them as easy-to-operate as possible to attract more members.
Affinity Capital Exchange estimated that the loyalty-related value on the balance sheets of airlines, hotel, banks, large retailers and rental car companies worldwide was around USD350bn.
The company said: “Loyalty has evolved into a multi-billion dollar industry, as companies and customers discover the purchasing power of loyalty currencies. Mileage sales offer high margins and are rapidly boosting airline revenues and profits, recently eclipsing ancillary fee-revenues”.
Atanas Christov, president & CEO, Affinity Capital Exchange, told us: “I had thought that loyalty programmes were just for marketers, what I couldn’t reconcile was that I was seeing major money flows.”
Christov pointed to the refinancing of American Airlines by Citibank, in which, of USD6bn, USD3.6bn was, he said, financed by points. He added: “I could see that there was a financial element there. The consumer thinks that it’s funny money – which is how it’s meant to be. For the longest time airlines were doing the smart thing, with customers paying in advance for points and them doing everything in their power to stop them from using them.
“The way we got here was by realising that we had a massive ecosystem, bigger than many of the economies in the world – it is the largest stack of non-sovereign currency in the world and the widest held, being owned by 2 billion people. This is something which is lacking in infrastructure and all that was happening was they were passing money from banks to airlines.”
Christov described the rapid expansion of the loyalty programmes, where the volume of points was increasing at a much faster rate than capacity, devaluing the points and forcing airlines to bring in “draconian laws which went against the consumer”.
The CEO added: “We don’t have any idealistic goals, it’s a new asset class – we’re doing this because airlines are stuck for capital. We think that, by showing them unencumbered assets, they are getting a brand new fleet that they can securitise as much as they want.”
The exchange will include a primary marketplace for raising capital and investment and a secondary marketplace on which points portfolios are exchanged between buyers and sellers of loyalty currency, with transparency using market derived point-valuation mechanisms.
Using the hotel sector as an example, Christov described a scenario where a hotel could invest in securities based around its own programme, then put it into an endowment which could then pay for that programme going forward, adding: “It’s very smart and very similar to what people do in the real world, it’s just a different core asset, this is a classic approach to how people deal with portfolios of assets”.
Christov said: “There have been cases where loyalty programmes have been spun off and sold to private equity houses. When you talk to people who write the cheques, they say it provides a hedge to their investments in these industries. Loyalty points are what are left holding the baton when they go bust and seven of the largest credit cards out there are linked to loyalty programmes, that’s what gave hedge fund analysts the chance to see a risk-management opportunity.
“With a pool you have a better cross-section of exposure – while the customer may feel it’s inconsequential, it isn’t. The customer sees this as an invaluable thing, but this is changing.”
The exchange will be open to hotels, airlines, banks, hedge funds and other institutions, but not retail investors due, Christov said, to the costly and time-consuming regulations involved which were prohibitive to a start-up.
HA Perspective [by Katherine Doggrell]: A hotel investment which allows companies to hedge against the operational performance of the hotel sector is one which could bring much cheer to this cyclical segment.
The exposure of loyalty programmes to an exchange where they can readily be valued is not likely to be welcomed by all. Christov described one airline CEO who balked at the idea of his customers being able to see a second ticker, one linked to the loyalty programme, which gave customers a value in their mind of what they were holding.
But what the customer is holding – and the exchange is expected to be able to price in factors such as ease of redemption – could be the next great source of hotel investment, if the airline industry is an example. And with the brands on a drive to boost membership, the potential is only growing.
Unlike the airline industry, hotels have a number of stakeholders to deal with – not least the owners who pay for the loyalty programmes and may feel they have some ownership of any proceeds. Christov said: “The hotel company can determine what balance it needs to keep on hand – and turn the rest of the issued points into financing/reserve type and use to back new security issuance. As the points are not property of the owners or the customers, we see no issue in these being utilised as the bank determines, provided programme operations continue without shortage of liquidity.”
Given the extensive capacity for some hotel owners to feel aggrieved, a careful tread may be needed here.