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Beyond The Limits Of Cash or Credit

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Editor�s Note: The following comments and observations are those of Peter Tucker. They were provided to BarterNews on August 24, 2006. (Peter Tucker is the CEO of CTEX.com, http://www.ctex.com  a company that has developed its own proprietary secondary capital instrument known as �CTEX Private Capital.�)

Open Sesame!

Just Like Ali Baba, Points.Com Unlocks A 14 Trillion Frequent-Flyer Treasure Trove...

�Travelocity has signed an exclusive agreement with reward-management portal Points.com to develop �Book with Points,� a new product that lets loyalty-program members use miles and points from their various reward programs to directly book travel services.�

I love the quote from Points International�s chief executive officer.

�The most significant challenge that our loyalty program partners around the world face, as they grow their successful enterprises, is providing access to rewards for their best customers,� said Rob MacLean, Points International�s chief executive officer. �While millions of flights, hotel nights and other rewards are provided every year, there continues to be demand for even more access and availability. Our agreement with Travelocity is uniquely positioned to help loyalty programs finally follow through on the �any award, any time� travel promise, and to do so using our two companies� world-leading technologies.�

Is this not the same goal of the barter industry? Let�s change some words in the above statement and pretend the statement came from the CEO of IRTA�s Universal Currency�

�The most significant challenge that our exchange program partners around the world face, as they grow their successful enterprises, is providing access to trades for their best customers. Universal Currency will help barter programs finally follow through on the �any trade, any time� exchange promise.�

So what are these guys doing that we might emulate?

Points.com in reality is not a dissimilar type of organization to the commercial barter industry�s Universal Currency, except that points.com has established ways and means of valuing the different currencies, essentially by negotiating exchange rates (adjusted cash values)...while at the same time leaving the customer interface with the issuing reward point system untouched by the subsequent trading relationship on points.com.

In other words preserving the integrity of the client-customer relationship of participating partners in the system, without fostering competition or circumvention worries. No partner wants or needs to steal the other partners� customers, on the contrary they want to encourage them to trade, read on and you�ll see why.

For example on points.com 9,037 American Airlines AAdvantage points exchanges for a $38 gift certificate from Amazon.com

To illustrate further, let�s look at a theoretical perspective of American Airlines in this transaction, as the cash benefits to Amazon are obvious.

A member of the public spends $1.00 on his AA co-branded credit card and earns one AAdvantage mile credit. What�s typically happened is that the credit card company passes through the 2% merchant fee to purchase the mileage credit.

Put it another way in the above transaction American would receive 2% of 9,037 miles, originally customer redeemable script for predictable seat vacancy now morphed to $181 in cash, since they started selling airmiles.

In the AA/Amazon transaction you�ll see that American cashes out by reducing a 9,037 liability for $38 in cash, leaving $143 profit to be divided between American (the seller) and Points.com (the facilitator).

American wins two ways: First, they are finding a way to burn off the frequent-flyer mileage liability (credits) they issued and they only managed to redeem 4.5 million mileage credits in 2005. Second, they are making another cash gain from this secondary transaction.

In other words, it�s cheaper for American to pay points.com a cash fee and provide Amazon $38 in cash for a voucher, than to redeem the miles they sold for a flight voucher (script they issued)

In our theoretical illustration, American collects $500 in cash for a 25,000 round trip domestic travel award as its selling price has a 2% cash value. However, if a $38 cash voucher from Amazon costs 9,037 AAdvantage miles on points.com, then the cost to American to redeem (liquidate a 9,037 liability) is just 0.0042%.

25,000 x 0.0042% cash cost = $105.12 American Airlines cost to liquidate 25,000 milage credit liability, sold originally for $500 cash.

Let�s relate this to what a commercial barter company might charge for facilitating a $25,000 transaction.

$25,000 trade transaction x 12.5% cash service fee = $3125. (Trade exchange service fees will vary from 10% to 15%.)

I�m suggesting the barter industry and UC should indulge in similar transactions, because arguably these are highly profitable arrangements for all concerned�

The point is that now with this latest announcement we are seeing once again the blurring of traditional barter and cash systems in highly sophisticated web-based interfaces, and the partners in this exchange are household names, trading and exchanging frequent flyer rewards, accommodation rewards and frequent shopper rewards. All accomplished without any cash changing hands, as the true cash cost of the transaction is opaque to the buyer and handled behind the scenes by the trading partners�

What's not apparent to the traders, who merely think they are exchanging points of one commodity for another, is that the actual Points.com currency has an exchange adjusted cash value, and it is the cash value of the points that is facilitating the transaction.

It's a complex transaction, but well worth the cost of unlocking the cash value of frequent-flyer points. But don�t listen to me, take the words of Points.com Chairman Douglas Carty, quoted in The Economist Magazine, "almost 14 trillion frequent-flyer miles had been accumulated worldwide as of the end of 2004, and the outstanding balances were still growing by almost 20% annually over the last decade."

When using the rule of 72, the foregoing means that the outstanding balance of the worldwide frequent-flyer currency will be almost 28 trillion by June 2007.

It�s not a �shell game� but you also have to realize that's not the cash value of these points either. The cash value is possibly more like 1-2% of the points value.

2% of $14 trillion = $280 billion dollars, but by next June that will be $560 billion dollars, and growing.

What�s the bottom line and the vision looking forward?

Perhaps it goes something like this�

The Internet spawns barter2.0 where a whole new way of doing business between seemingly dissimilar partnerships emerges into a ubiquitous trillion-dollar open trade exchange system.

  • There�s a new barter system in town called barter2.0.
  • The velocity is phenomenal with trade account values doubling every 3.6 years.
  • The public holds accounts valued a 28 trillion frequent flyer miles or points in the system ($580 billion).
  • The partners in the system don�t compete for clients; they encourage them in reciprocal trade.
  • The partner cost of the transactions is just 0.0042% in cash.
  • The public cost of the transactions is zero.

Meanwhile in another scenario the partners in the traditional closed trade system, the commercial barter industry, stuck to their guns�

  • There�s a barter system called UC. (Universal Currency)
  • The velocity is stagnant, consequently trade account values shrink each year.
  • The public (the aggregate business owners worldwide who are members of barter companies) holds accounts valued at approximately $6 billion trade dollars in the system.
  • The partners (barter companies) in the system compete for clients, they discourage reciprocal trade.
  • The partner cost of the UC transactions is � of 1% in cash on the buy and � of 1% in trade on the sell side.
  • The public (business owner/member of the trade exchange) cost of the transactions approximates 12.5% cash. (Trade exchange service fees vary from 10% to 15%.)

Send your observations, comments and thoughts on this article to: bmeyer@barternews.com .

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