A loyalty points exchange is a service that lets points earned in one loyalty programme be spent in another, for example by converting credit card reward points into airline miles. It connects many programmes through one shared hub, so that each programme needs only one connection, not a separate agreement with every other programme.
Why is it needed? A member often has small balances in many programmes: some card points, some hotel points, some airline miles. Each balance alone may be too small to buy anything useful. Converting them into one programme makes them worth spending. For the programmes, a member who can use points easily values the programme more.
Without an exchange, a bank that wants its card points to convert into ten airlines' miles must sign ten agreements and build ten technical connections. With an exchange, it connects once. The exchange holds the conversion rates between programmes. It debits points from one programme, credits points in the other, and settles the money between the two companies.
Say you hold a bank's credit card and have 10,000 reward points. You want to fly, so you choose to convert them into an airline's frequent-flyer miles. The bank has set the rate at 2 points for 1 mile. The exchange debits 10,000 points from your account in the bank's loyalty programme. It then asks the airline's loyalty system, which holds your frequent-flyer account, to credit 5,000 miles. This system is usually a separate product, connected to the airline's passenger service system. The bank pays the airline for those miles at a price the two have agreed, say ₹0.40 a mile, which comes to ₹2,000. The miles appear in your account, often within minutes, though some programmes take a few days.
Why does the bank pay? Because the airline is giving away seats that it could otherwise sell. Each mile is a promise of a future seat, so the airline sells miles to banks and hotels for real money. Points are a form of virtual currency: they have a price, but they can be spent only where the programmes allow. Many such cards are co-branded, issued by a bank together with an airline, which is explained on the page on co-branded credit cards. The card's points are set up through a card issuing platform.
Conversion is also a target for fraud. A criminal who takes over a member's account can convert the points and spend them quickly. So exchanges often send a one-time password (OTP) before a conversion. The exchange runs as a part of loyalty programme software.