Is the metaverse the next frontier for banks?

Ever since Meta, formerly Facebook, gave that presentation on its move to the metaverse, the virtual world has become more of a reality.

The concept of the metaverse has been around for many years. Virtual reality and augmented reality technology have helped blend the real and digital world, with us getting ever closer to a sci-fi fantasy.

While we are still very far away from The Matrix, there are several metaverse platforms people can explore. One popular one is Decentraland, which initially launched in 2017. Decentraland is a decentralised virtual world where people can buy plots of land and create items to fill the world. It is run by a DAO (Decentralised Autonomous Organisation), which owns the most important smart contracts and assets. There is a sense of community contribution to the platform’s development, with any policy updates, land auctions and whitelisting of NFTs being voted on by the community.

Last month, JP Morgan became the first bank to join a metaverse. It opened its Onyx lounge on the Decentraland in Metajuku, which is a virtual version of Tokyo’s Harajuku shopping district. Its room is decorated with an image of its CEO Jamie Dimon and a free-roaming tiger.

Alongside the move, the bank released a detailed document outlining what the metaverse is and why it is important. It said, “We believe the existing virtual gaming landscape (each virtual world with its own population, GDP, in-game currency and digital assets) has elements that parallel the existing global economy. This is where our long-standing core competencies in cross-border payments, foreign exchange, financial assets creation, trading and safekeeping, in addition to our at-scale consumer foothold, can play a major role in the metaverse.”

The metaverse is being met with the same hesitance as the adoption of cryptocurrency and NFTs by some, but not by everyone. Karen Oakland, the VP marketing for financial services at conversation management software provider Smart Communications, said, “We’re living in such a time of change in the way consumers and businesses interact, and in many ways it’s generational.

“For many Baby Boomers and older generations, that virtual world is seen as limited to areas like gaming – it doesn’t seem real or it’s just a trendy topic generated by marketing.” Oakland continued, “But the Metaverse is becoming so much more than that, especially for individuals and businesses selling virtual goods. As the JP Morgan report states, virtual worlds in the Metaverse have their own population, GDP and currencies. It makes sense that banks would want to use their experience to extend their services into areas like trading, lending, cross-border payments, virtual wallets and account management.”

Oakland stated JP Morgan’s move enables it to be seen as a market leader in the metaverse, even if it is still unsure how banking customers will want to manage money in the virtual world.

Several financial players shared the sentiment that JP Morgan has made the move to get a head start on the competition. Mark Basa, the global brand and business manager at decentralised financial product developer HOKK Finance, stated JP Morgan’s move was a way to catchup to the cryptocurrency market and chase the customers engaging with this new medium.

Similarly, Michael Olaye, VP, managing director, client services at innovation consultancy R/GA, also praised the bank’s willingness to adapt. Olaye said, “Make no mistake that having a metaverse strategy for them and launching it this way does show a business that is willing to explore new avenues for growth and relevancy as the digital landscape of how future customers could interact with a bank business might be.”

However, not everyone believes the metaverse is a hot topic. Instead, they see its potential being inflated by hype.

Fredrik Davéus, CEO of financial analytics API developer Kidbrooke said, “Many of the aspects of the current somewhat unwieldy definition of “metaverse” is neither new nor revolutionary. E.g., people have always been prepared to attach value to superficial things.

“Most of the NFTs today are not that different from the first time someone paid for an oil painting. Much of what is happening now is simply hype and how things materialise in the future will be different. E.g., most of us having interacted virtually through video meetings during the pandemic I think is a very tangible example of a part virtual workplace. Especially if you include the image backgrounds people have been using. Also, kids are already playing games on platforms such as Roblox. Hence, some form of “metaverse” has been ongoing for some time.”

Will more banks enter the metaverse?

With JP Morgan taking the plunge, it raises the question of how long it will be before others follow suit. Hokk Finance’s Basa explained this trend will be happening very soon. “My contact told me about a ”small fund” another major bank is setting up to purely invest in the metaverse and crypto. They’re going to run a trial and put $1bn towards the fund, and if it does well, they’ll put $100bn in five years.”

Anthony DiMarsico, CEO of crypto banking platform Banxe USA, said firms should not hold off any longer. “It is a major part of the Bank 4.0 tendency. Joining metaverses now is the perfect time. Becoming a part of the metaverse financial infrastructure now is the equivalent of creating a website, or online store, in the early 90s. I am forecasting that we will observe a new category of startups and metaverse based fintech startups, which will serve their users in Decentraland, Sandbox, and others.”

It is hard to tell how or when other companies will make the move, but there is a general consensus that it will happen at some point. Remonda Kirketerp-Møller – founder and CEO of RegTech firm Muinmos – considers there are two core circles of influence that will decide when banks make the move. The first is the clients’ circle. Kirketerp-Møller said, “When clients were only in the physical world, so were banks. Now, when clients are spending hours a day online, banks are also online. If you have clients spending hours a day immersed in an alternate reality, that’s where the banks will go as well. After all, they have to be where their clients are.”

The second influence circle is a monetary one. Banks previously sold products that were a result of a real-world factor, but now abstract factors, such as algorithms have changed this. Now, money can be created in cyberspace, through things like cryptocurrencies and NFTs.

She concluded, “As banks’ main business involves customers and money, and as these two are now becoming increasingly virtual, I think it’s only likely we’ll see more and more banks make the move to the virtual world as well.”

Benefits of the metaverse

Being in the early stages of development and growth, it is hard to pinpoint what the potential benefits firms and consumers could experience by operating through a metaverse.

Kirketerp-Møller explained, that as there are so many different providers of metaverse systems, it is unclear what the future holds and what ones will become the dominating platforms. Opportunities could include better international co-operation, supervision and stability, but that will depend on many factors.

Similarly, David Ritter, the financial services strategist at digital consultancy CI&T, stated, “There are no meaningful benefits until a critical mass of consumers is spending significant time on metaverses. Not just to play games and socialise, but shopping for real-world products and services.”

Others painted a more optimistic picture of the future for metaverse. For example, Banxe USA’s DiMarsico stated that the borderless nature of the technology means more people from anywhere will be able to access it. Through the introduction of crypto payments, the metaverse could help bolster financial inclusivity around the world. Additionally, R/GA’s Olaye stated payment processing and customer brand experiences will be among the most significant opportunities the metaverse holds.

Another big benefit that could come about from the metaverse is an improved customer experience and communication, according to Smart Communication’s Oakland. The pandemic has helped shift people towards digital interactions and the metaverse offers another alternative to physical interactions.

Similarly, David Donovan, executive vice president of financial services, Americas at digital consultancy firm Publicis Sapient, said, “Having access to virtual bank branches is a great alternative to getting in your car and going to a physical bank branch. Consumers can now enjoy personalised banking services in the comfort of their home in potentially a much more immersive way. All your traditional services can be provided through this channel.”

Then there is the opportunity for new financial products that are entirely based on items in the metaverse. Donovan added, “Banks will have the ability, or at least the opportunity, to finance real estate deals in the metaverse, similar to the physical deals currently serviced. Consumers will need mortgage and acquisition services in the metaverse in retail and commercial just like the physical world.”

He continued to state that real estate plots are becoming very expensive in places like Decentraland. For example, NFT real estate company Metaverse Group recently made a $2.4m acquisition of a plot of land on the Decentraland. This is just one of many increasingly sizable purchases for land on metaverse platforms. Donovan said, “Last year, virtual real estate spaces like Decentraland and Sandbox reported 86k of transactions totalling 500 million. Virtual Land has appreciated from 5k early in 2021 to 15k starting in 2022. The land represents digital business revenue opportunities in gaming and gaming software, virtual media events, live entertainment, and conferences.”

HOKK Finance’s Basa also highlighted the opportunities available to banks to make money through high-risk investments. “You can buy tokens in many of these early-stage companies for less than a penny, which means the bank can put say $100K here and there to different projects, and spread their risk far and wide. If one of the projects hits a billion-dollar market cap (and many times they do), then the banks are laughing.”

Is it just hype?

Whenever there is a new piece of technology, it is easy for hype to set in. Often it can be remarked as an industry-changing solution, but eventually only makes a small difference. With major tech giants like Meta and Microsoft making moves on the metaverse, the metaverse looks like it could be the next hyped service.

From a technology perspective, Muinmos’ Kirketerp-Møller believes the metaverse could shift the financial services space in three core ways. The first is making it tilting the scale towards online and virtual services and away from physical branches. Secondly, it can add to the pressure put these days on traditional market players and market regulators in regard to accepting blockchain-based monetary products into the financial system. Finally, it accelerates processes such as tokenisation and will require more elaborate means of client identification and security.

Furthermore, Kirketerp-Møller added it’s hard to say the metaverse is overhyped. “Ask Ailin Graef, also known as Anshe Chung, or the ‘Rockefeller of Second Life’. She made, so it is said, more than a million USD by selling ‘real-estate’ in a completely virtual world. That was back in the early 2000s, where there were barely any online currencies. These days, with the abundance of cryptocurrencies, I think the opportunities are thousand-fold.”

The Muinmos team is not just sitting back and watching, with plans to enter the metaverse. “Financial institutions will have to deal with client onboarding in a completely digital environment, and we’re already doing that, for years now, also dealing with the legal aspects of it, so it will be something that we would very much consider.”

This positive attitude towards the metaverse was expressed by several other contributors, but equally many were uncertain of its future to truly disrupt banking. R/GA’s Olaye explained the Web 3.0, which the metaverse ecosystems are based on, is on the blockchain. Banks have already been exploring how to leverage blockchain solutions for many years, the metaverse is just the framework currently in the limelight.

As for whether it is currently overhyped, Olaye said, “I see the Metaverse or Web 3.0 playing out the same way the internet did in the early 2000s, just before the crash. Lots of fast ‘short-term’ innovation opportunities, but in the long run, the platforms and brands with creating the best long-term strategies to tackle the many complex business, design, and tech challenges to remain relevant to the end-users will come out on the other side with products and services that will drive a new generation of how the internet works.”

Others were a lot more sceptical of the opportunity it would really provide banks at all. CI&T’s Ritter explained the metaverse is just another way to engage online. “I don’t believe this will be a big technology shift for financial services, just a new and potentially much more immersive experience than web or mobile has been. But, continued advances in internet speed and reliability will be critical to mass adoption, as will be the cost of access devices like AR/VR headsets.”

A different form of metaverse

The metaverse is based around the concept of a virtual space to interact with others. Kidbrooke’s Davéus believes the metaverse is not the future of banking, but ‘meta-like’ services will be. For example, leveraging video calls to engage with customers.

“If you consider video calls, it has had a tremendous impact on wealth managers during the pandemic who were able to continue with personal meetings despite the restrictions of physical movement,”Davéus said. “So any form of “metaverse” has the potential to expand availability and save time from that perspective. I just don’t think it is very clear what form it will take from here (i.e. the Meta “vision” presented recently, I think is nonsense).”

Davéus also believes firms will be better off using technology that has proven itself over the years, such as AI, and seeing how this technology can be used to transform banking in new ways. “[It] pays off to actually do stuff using the proven tech of yesterday that survived previous hypes instead of always searching for the next silver bullet.”

The need for regulation?

Regulations are a good way to ensure consumers are protected and will not be exploited. The virtual world is still a mystery for many. Despite cryptocurrencies first popping up in 2009, many regulators around the world are still unsure how to correctly regulate them. The metaverse is another complicated layer that regulators will need to get their head around and build the right protections.

All of those FinTech Global spoke to expressed there was a need to ensure regulations are brought to the metaverse and all other virtual spaces. These will build trust in the ecosystem, push more innovation and prevent people exploiting the systems for money laundering.

One area that could be in need of a serious look is taxation. Jackie Kyle, director of strategy and corporate development at e-commerce service provider Digital River, said, “Purchases are going to be taxed, and it’s likely that physical location is still going to dictate which taxing jurisdiction to apply to transactions. While fully virtual transactions may not tie directly to the physical world, a user’s physical location is the easiest way for governments to ensure that no purchase goes untaxed.”

This is going to be of particular importance for brands. These firms will need to ensure the correct amount of tax is collected for transactions. “This means gathering sufficient information from the end consumer purchase and applying the right tax decision, so brands will need to be sure that they’re receiving accurate location information from customers.” If there is an audit, these brands will need a record stored for baseline information used in tax decisions, Kyle added. These processes will likely require firms having to expand their compliance teams.

Another area for regulation will be personal privacy. Data protection is a major regulatory requirement from firms around the world. The metaverse could open a whole new raft of data that could be collected on consumers. Kyle said, “Physiological and behavioural data could be compiled, such as tracking where consumers’ eyes move, how long they linger in certain areas, and the digital spaces they visit. This could be unsettling for privacy-savvy consumers, and new regulations for consumer and data protection are likely to arise.”

There are not only the regulatory requirement protections that need to be considered, but there is also cybersecurity. There seems to be a never-ending barrage of cyberattacks reported in the news, and there are no signs of them ever stopping. The metaverse poses a new environment that can be exploited by cyber criminals, and new tools will be needed to prevent them from succeeding.

Smart Communication’s Oakland said, “The Metaverse takes issues of cybersecurity to a whole new level, especially with financial services. From the standpoint of processes like compliance with anti-money-laundering regulations or delivering compliant customer communications, what does that look like in the metaverse? It’s going to take new thinking to solve these issues from a new generation of banking leaders with more experience in the metaverse. If anything, JP Morgan’s move into this space will help the bank take the lead at answering these regulatory questions.”

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