The Metaverse is notoriously hard to define. Those definitions which do exist describe a digital facsimile of the physical world, which people enter as avatars by donning headsets and hand sensors. Once inside, they walk around, talk to people, attend meetings and events, visit buildings and buy and sell goods and services, just as they do in the physical world. For businesses, it is the last of these activities that matters. For them, the Metaverse is a new way to find customers and sell them things. Indeed, the fact that Facebook has changed its name to exploit the opportunity has prompted many to predict that the Metaverse will take the manipulation of human behaviour to a whole new level (one comparable, perhaps, to The Matrix) and that users will once again be products rather than customers or creators. Already, Facebook has a digital wallet (Novi) and a Stablecoin (Diem) whose original use-case was to enable Facebook users to buy and sell products and services through the social media platform.
Opening branches in the Metaverse will test bankers as merchandisers
Wherever transactions occur, banks can almost always be found, transmitting money or exchanging monies. Nor is there any reason why the products being sold in the Metaverse (and they are sold rather than bought) should not generate sales of other financial products, such as insurance and asset management. However, unlike Facebook, traditional financial institutions have so far failed to convince themselves that they can profit from the Metaverse. Yet there are some obvious moves to make. The fact that Bank of America is using Virtual Reality (VR) headsets to make its salesmen and relationship managers more effective is not Metaversal: it is just a training aid of the type airlines and armies have used for years. But the next step is conspicuous: close physical bank branches, open virtual bank branches in the Metaverse and replace the flesh-and-blood salesmen and women with virtual reality avatars that customers can engage with instead. In fact, this move is so obvious that Kookmin Bank in Korea has already made it, and other Korean banks and brokers are following its example.
This type of investment is typically dubbed a new “customer experience” rather than a cost saving measure. And if that is what the Metaverse amounts to, it is clearly over-sold because all it really means is that the customer will experience the digital sales pitch in 3D rather than 2D on the company website. Retail branches are also where banking gets closest to a shopping experience – and, since banks are in a class of their own when it comes to under-exploiting retail real estate, it may not be the soundest place for banks to begin. It is not foretold that banks can make the Metaverse work for retail banking in the same way that it works for clothing stores (how does that dress look on my avatar?), hospitality (is this the right hotel room for us?), estate agents (would you like to take a tour of the property with me?) and healthcare professionals (shall I map the scan on to the patient now, doctor?). The same is true of wealth managers, who are more likely to treat avatars as a threat to client relationships than a useful cost-saving or capacity-enhancing innovation.
Doing the same differently, and not necessarily better, feels underwhelming
Nevertheless, it is even harder to conceive of opportunities in the Metaverse for those parts of the financial services industry that do not face retail customers. In fact, it is significant that PwC, which predicts that VR and augmented reality (AR) will boost global GDP by $1.5 trillion by 2030, chiefly by transforming productivity – in exactly the way that Kookmin is doing – does not even include financial services as a use-case in its report on the subject. It is not surprising either. Many of the Metaverse use-cases now being put forward for financial services – such as on-line meetings in 3D rather than 2D, with attendees able to summon data without using PowerPoint and screen-sharing – feel, like so much of what passes for innovation in modern business, incremental rather than transformative. Bill Gates may have predicted recently that most business meetings will occur in the Metaverse within the next two to three years, but they are still meetings. At this level, the Metaverse is no more than a case of doing the same thing differently, if not always better.
The Metaverse needs to get a lot less clunky
Yet these banal use-cases are a true reflection of the origins of the Metaverse in video gaming (and video-conferencing) rather than the Internet. To amaze the world, the Metaverse will need to overcome those origins. Scale and speed are ways to do that. The Metaverse has the potential to transcend the Internet by hosting games or meetings in which everybody participates, unlike the relatively small groups which current bandwidth and processing power can support on the Internet. In this sense, a fully realised Metaverse will not be a Web 3.0 but a replacement for the Internet as a technology platform. But to get to that point, the Metaverse must overcome some major engineering challenges. Not the least of these is the headsets. True, they are faster, more reliant on connectivity than storage and less clunky than they once were, but it is still hard to believe that the current method of entry to the Metaverse will enthuse consumers, even if they are not prone to claustrophobia, nausea and self-consciousness about wearing a brick on their face and waving their arms about.
That the engineering challenges can be defeated is not in doubt. After all, a fully realised Metaverse will come close to being the apotheosis of the strongest version of the Turing principle: “It is possible to build a virtual reality generator whose repertoire includes every physically possible environment.” But building Cloud-based data storage, adding local processing power and making the (necessary) 5G networks universally available is the easy part. It will take much longer to make the Metaverse user-friendly and to populate it with places, services and attractions that lure people in. The industry must also develop data standards to facilitate the exchange of the necessary quantities of data. This is an area in which the IT industry is notoriously deficient, not least because the major corporations that dominate the industry suffer from a preternatural reluctance to cede ownership and control of any aspect of their intellectual property or client base. The future can expect Microsoft to want to own the “work” Metaverse; Facebook to want to own the “play” Metaverse; and Amazon to want to own the “shopping” Metaverse.
`49er investment strategies are already being sold
Before the Metaverse settles into an oligopoly of this sort, there will be a great deal of capital investment and merger and acquisition activity as companies jostle to buy the talent and the equipment and especially the content needed to build a credible presence. Already, Microsoft has sunk US$68.7 billion into the purchase of gaming vendor Activision Blizzard. Which is why some analysts have concluded that the one certain way for the financial services industry to make money out of the Metaverse is for asset and wealth managers to bet on the stocks of the businesses manufacturing the components: the headsets and sensors and 5G mobile networks and video games that will bring the Metaverse to life. It is the strategy forever associated with the retailers who sold supplies to Californian gold panners in 1849, and never fails to attract investors. eToro already offers MetaverseLife, a portfolio exposed to stocks likely to profit from mounting investment in the Metaverse.
Gaming offers a glimpse at a Metaversal economy
A variant of the classic `49er strategy is to build on the fact that the Metaverse is closely related to a Blockchain-induced threat to the comfortable existence of banks and asset managers – namely, tokenisation. Tokens – and especially Non-Fungible Tokens (NFTs) – are a product of the gamers’ imagination. And, like gold-panners, gamers represent a large market. According to Newzoo, 2.9 billion people pay US$175.8 billion a year to play computer games. But that may be where the parallel ceases to be useful. What maters about gamers is that they have pioneered a virtual economy of the kind the Metaverse will extrapolate. Gaming is not synonymous with the Metaverse, but it does offer a glimpse of what a Metaversal economy could actually be like (indeed, gaming will one day be subsumed into the Metaverse).
Gamers have been “earning” tokens to buy items in games for years. Successful players have profited from “streaming” – in which aspirants pay subscriptions or generate advertising revenues to watch the best play the games they love to get better at the games themselves – for years. Today, players buy and sell digital goods, or fulfil digital tasks, or play digital games, for tokens that can be turned into fiat currency. According to Reuters, the Play to Earn (P2E) market, in which people play games to earn tokens, generated revenues for players of US$2.5 billion in the first half of 2021. Blockchain-based P2E video games such as Axie Infinity, Decentraland and Sandbox also reward players with tokens, whose value includes voting rights to determine the evolution of the game – an iteration of an idea as old as Dungeons and Dragons, which was first published in 1974.
The Metaversal economy will welcome asset managers and insurers but it needs banks
In short, a Metaversal economy, in which consumers transact at scale for purely digital items or in return for purely digital forms of work, via purely digital marketplaces, exists already. And there is an obvious role for financial services firms to play in it. Asset managers could accept tokens as subscriptions to funds, or even run games of their own that reward players with tokens in funds. Insurers can replace salesmen and claims handlers with avatars. But the most obvious opportunity in the Metaverse is for banks. They can make payments in the Metaverse, on behalf of people and companies to people and companies for doing work or supplying digital goods and services. Banks have an FX-style role to play too, helping users translate value between fiat currencies, crypto-currencies, Stablecoins, tokens (including in-game tokens), NFTs and (one day) central bank digital currencies (CBDCs). Lynx Global Digital Finance Corporation has already built Metaverse apps for banks that aim to help consumers use the Metaverse to sell NFTs and send remittances.
Lending is another opportunity. Unlike crypto-currencies, NFTs have some claim to underlying (if not intrinsic) value. They are unique, ownable, transferable, rights-bearing, income-producing, royalty-yielding, and asset class-extending. So banks can lend against NFTs as collateral to enable borrowers to buy land, houses and other goods and services in the Metaverse as well as in the physical world. After, real estate is already changing hands in the Metaverse, with better locations (such as those next to the estate being developed in Sandbox by Snoop Dogg) selling for premium prices. Physical collateral could underpin lending to acquire digital assets, and vice-versa. This would express the purpose of the Metaverse, which is to narrow the divide between the physical and the virtual worlds. No substance on earth is better placed to help that to happen than finance.
The keys to success in the Metaverse just need to be picked up by the banks
By servicing pioneering users of the Metaverse, banks may even reclaim some of the customers they have lost to digital challengers in payment and retail banking. But the most powerful way in which the banks could stake a claim of their own in the Metaverse is by taking digital identity seriously for the first time. Unique digital identities, represented in the Metaverse by avatars, which can be used to interact with multiple vendors, would be invaluable. In manufacturing and maintaining these, banks can provide a trusted alternative to the federated user identities of Facebook and Microsoft, which are tainted by association with the gathering and monetisation of personal data.
Digital identities would associate banks with a much more hopeful vision of the Metaverse: a world of decentralised but connected Metaverses created, owned and controlled by their users. The Metaverses would function like nodes on a public blockchain, in which companies are democracies rather aristocracies and trust is afforded not by intermediaries but by the digital identities themselves. Such a vision would provide a vivid and flattering contrast to the oligopoly favoured by the FAANGs. And if the banks can also tie digital identities to digital wallets, they could take ownership of all transactional activity in the Metaverse to boot. Why would banks not want to do that?
Future of Finance on March 2 will discuss this at a webinar which will attempt to answer that question and explore what other opportunities lie in wait for the more resourceful and imaginative financial institutions prepared to explore the Metaverse.
Among the topics to be discussed at this webinar are:
- Is there a sound definition of the Metaverse?
- What does the Metaverse owe to the video-gaming industry?
- Is the Metaverse best built on blockchain technologies?
- Are crypto-currencies, Stablecoins, utility tokens, payment tokens, security tokens and Non-Fungible Tokens (NFTs) incidental to the Metaverse or central to it?
- What financial services use-cases for the Metaverse are there?
- How do those use-cases vary between (a) banks (b) asset managers and (c) insurers?
- How can the Metaverse avoid becoming a series of walled gardens as opposed to a decentralised network of parallel but linked Metaverses?
- How can standards best be developed to facilitate data exchange between Metaverses?
- How serious an obstacle to progress are the headsets and sensors?
- Does the technology currently support the production of compelling content, especially in terms of speed and scale?
- What are the major engineering challenges that the Metaverse poses?
- Who is best-placed to make money – in the short term and the long – from the Metaverse: equipment sellers or vendors within the Metaverse?
- How does money enter the Metaverse (as opposed to being exchanged within it)?
- Does the Metaverse need money-changers or a money-changing infrastructure or can code alone do the job?
- Does the Metaverse need exchanges to price and trade digital assets?
- Will the Metaverse support token-based micro-economies (such as local sharing networks)?
- Is it sensible to buy virtual real estate in the Metaverse?
- Can the Metaversal model disrupt the large corporations that dominate the video-gaming industry (e.g., by gamers becoming creators, owners and directors as well as customers)?
- Is the Metaverse a case of Web 3.0 or an entirely new networked digital technology platform?
- How will the Metaverse fulfil its promise of blurring the distinction between the digital world and the physical world?
Written by Dominic Hobson, Co-Founder Future of Finance
For more information please contact Wendy Gallagher on firstname.lastname@example.org