What is the metaverse? 

While most of us have now heard of what some deem to be the “future of the internet”, what is the metaverse, really? The term “metaverse” was actually coined in the 1992 science fiction novel, Snow Crash, the large majority of us became aware of its significance after Facebook rebranded itself to Meta, back in 2021, with additional plans to invest billions of dollars into the concept. Despite some referring to the metaverse as the inevitable evolution of the internet, it’s largely accepted to be an independent virtual reality world with a digital economy, where people can interact with each other similarly to our physical world.

The metaverse doesn’t refer to any one type of technology but instead references how we as a society are interacting with it. Despite this, there are a few technologies which are largely associated with the metaverse; these include virtual reality (VR) and augmented reality (AR). As McKinsey has estimated that the metaverse economy could generate as much as $5 trillion by 2030, it’s time we all start paying attention to what it actually means for the future of banking.

Is the metaverse just marketing hype?

While things have progressed since our first encounter with the idea of the metaverse, it still doesn’t really exist as a far-reaching concept. That being said, many companies from different industries believe the metaverse to be part of the new digital economy, where people not only buy and sell goods but also create them. While the metaverse is no doubt an exciting and potentially fruitful next step, a significant amount of work must still be done to make it part of our everyday reality.

For example, while most art NFTs are portable and can be sold on different marketplaces, they are linked to the currency of the metaverse environments, which makes them siloed to some extent. In reality, the role the metaverse will play in our lives is still deeply uncertain; its success is dependent on a huge shift in our habits. With the importance of physical connections to other humans heightened during the pandemic, will the majority of people be willing to navigate a digital reality for hours a day, if it’s not absolutely required? Almost as part of a large marketing hype, it seems everyone wants to sell us this idea of the metaverse, without considering that our world is still very much physical. 

What’s currently going on with the metaverse?

Despite the metaverse still being a concept needing further exploration, companies are nonetheless investing in so-called metaverse-backed projects. Tech companies including Microsoft, Meta, Nvidia, Roblox and Unity are building technology designed to interact with virtual worlds, which will mimic our waking lives. For example, Epic is using virtual technologies to support its Unreal Engine 5 platform. While it is actually a video game platform, it’s being used by the film industry to create exciting virtual experiences.

The entertainment industry seems to be embracing this next digital step fully. Musicians are hosting concerts in the metaverse, and sports fans can even watch games and purchase virtual merchandise. Coca-Cola hopped on the metaverse bandwagon and released a new “flavor born in the metaverse” alongside an accompanying mini-game. It apparently tastes like pixels brought to life, but is this not just clever marketing designed to play upon our human curiosity for the unexplored? While there are clear opportunities in the realm of online learning and government services, is much of what is promised by metaverse enthusiasts just marketing hype?

Banking in the metaverse: what could you expect? 

E-commerce is expected to be the top contender when it comes to implementing the metaverse in day-to-day activities, with other sectors such as gaming, education, entertainment and marketing, also set to utilize the enhanced online environments made possible by the metaverse.

Interestingly, while virtual worlds may be entirely composed of digital assets, these have real-world value. Furthermore, consumer goods can also be advertised and sold in the metaverse, meaning that there are real opportunities for banks to offer financial services to those navigating the metaverse. To put it in perspective, a report by JP Morgan estimated there to be $1 trillion in yearly revenue possibilities for companies operating in the metaverse. From “buy now, pay later” financing to crypto, e-commerce, better customer experiences, and even retail partnerships, banks and fintechs have ample opportunities in the metaverse to attract new customers while offering additional services to existing ones. 

Picture: From “buy now, pay later” financing to crypto, e-commerce, better customer experiences, and even retail partnerships, banks and fintechs have ample opportunities in the metaverse to attract new customers while offering additional services to existing ones. 

While there is no doubt that banking in the metaverse has huge potential, it doesn’t come without its fair share of risks. Cybersecurity issues look differently in the metaverse than those we’ve experienced in the online world. The largest threats are scams, microtransaction abuse, and unfair play. Financially-motivated attackers are the biggest threat, as not only can an attacker steal funds, but they can also use the hijacked account to commit financial crimes like money laundering. Synthetic identities are also a very real concern; it’s estimated that 30% of identities are fraudulent in the metaverse, compared with 9% in the real world. Furthermore, it is very difficult to identify them, as these synthetic identities behave, at least on the surface, like true customers. Banks will have to draft new processes to help keep them and their customers safe from these threats.

Banks’ current role in the metaverse

The banking industry has now entered the fourth phase of evolution, transitioning from traditional banking, which involved one-to-one customer interactions, to internet banking, then open banking/finance which allowed for connection to third-party apps, and onto digitalized finance banking (NFTs and crypto). Those banks who have gone to pursue virtual banking in the metaverse, have evolved even further, to the fifth phase of banking. 

JP Morgan has actually become the first Wall Street bank to launch a virtual lounge on a metaverse platform. Other banks are following suit, working on ways for customers to access banking services as well as to provide educational offerings on the metaverse. Fidelity Investments even created Fidelity Stack in Decentraland (a metaverse platform that mimics the metropolitan area) to attract young Gen-Z investors; Fidelity Metaverse ETF also allows investors to invest in metaverse-based businesses. HSBC also started a metaverse partnership with The Sandbox intended to create innovative brand experiences, while Siam Commercial Bank has also established its headquarters in The Sandbox. This community provides a place for events, a space for businesses to connect over potential project collaborations and knowledge sharing, as well as offering an NFT gallery for new artists to gain exposure.

How can banks prepare themselves for the metaverse?

To get ready for the metaverse, banks must first and foremost have a strong core banking API. Why? As the metaverse is a new channel for customer engagement that completes the omnichannel device from mobile to desktop, to the physical branch, then to the call center, and so forth, banks require a processing platform API to make this possible. Unlike the first generations of the metaverse, these platforms are now open to the API ecosystem, making the potential for integration and extension of such experiences, now possible.

Next, banks must determine how they can differentiate themselves. First and foremost, banks must ensure that transactions done on the metaverse are comparable to those done in reality. With a focus on embedded finance and strategic partnerships, banks will need to invest substantially in terms of both money and effort. Their legacy technology must also be transformed alongside their marketing strategy and business model.

Picture: With a focus on embedded finance and strategic partnerships, banks will need to invest substantially in terms of both money and effort. Their legacy technology must also be transformed alongside their marketing strategy and business model.

In-depth changes need to be made to achieve success

Banks will need to build their new identities in the metaverse and will need help to do so. 3D artists, game designers, platform experts, and blockchain experts will all be sought-after profiles to help banks reach the so-called next frontier. As previously mentioned, there are also very real risks banks will have to address in the metaverse: how can they protect themselves and their customers from fraud and an invasion of privacy when fake identities are running rampant? With the shift towards AR/VR, banks will not only have to educate their staff on how to navigate in this new world but also their customers. An immense investment in not only technology but education is necessary.

With the virtual realm continuing to blend with the physical world, furthering the need for financial services, there is a real opportunity for banks to firmly position themselves in the metaverse. While JP Morgan believes the metaverse will “infiltrate every sector in some way in the coming years,” significant changes must occur in our society– including a shift from valuing virtual rather than reality– for this to be true. While we cannot predict exactly how much the metaverse will become ingrained in our society– and the extent to which it will influence our everyday lives– we can say that significant changes will occur for us all. With a myriad of regulatory, security, fraud-based, and data protection risks to solve, banks have their work cut out for them. Time will tell whether the metaverse is just another clever marketing hype or a catalyst to enter the next digital age.

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Vincent Pronier

Vice-President, Product Marketing

Sopra Banking Software