Metaverse and banking: Wild, wonderful world or wild, wild west

August 10, 2022 11:13
Photo: Reuters

What’s all the excitement about the wild, wonderful world of the metaverse or “beyond universe” so many people and companies are delving into? In layman terms, it can be defined as a series of interconnected, inter-compatible virtual worlds that are taking shape to enable people to connect, communicate, deepen, and extend work and social interactions digitally. As these worlds start to seamlessly converge our physical and digital lives using elements of virtual and augmented reality, the way we work, shop, learn, socialize and entertain will correspondingly evolve.

Why the metaverse matters in financial services

Virtual worlds will become a natural habitat in the future, with the anticipation that 25% of people will spend at least one hour a day in the metaverse for these interactions and transactions by 2026. Each of these worlds (with their own population, GDP, in-game currency and digital assets) has elements that parallel our existing physical world, with their participants seeking similar goods and services virtually.

And this includes requiring a smooth virtual commerce supported by a robust and flexible financial ecosystem. Therein, financial institutions (FIs) can be the e-commerce enablers, blending Web 3.0 with their long-standing financial services competencies to facilitate secure wallet functionalities and payment rails for metaverse products, services and economies.

Innovative FIs are already plugging into the metaverse to offer embedded finance (where financial solutions are deeply embedded into customers’ virtual experiences such that they seem almost ubiquitous or invisible) — primarily by participating and enabling the functioning of these virtual worlds.

Participating in the metaverse

FIs are starting to explore this space by engaging with the 250 million potential addressable user market (particularly the gaming, e-sports and creative communities) on the metaverse. Consumers in Hong Kong, for example, have one of the highest rates of adoption of neobanks globally according to a recent EY survey. Nearly half of them already have a product or service with a neobank and these digital banks are not shy in participating in the metaverse to capture new and specialized groups of customers or segments such as the gamer community. The intent is perhaps not so much to monetize on the metaverse (at least not just yet), but to develop immersive interactions and deliver more “human” and personalized digital banking experiences to remote customer communications.

Meanwhile, traditional banks are initiating these interactions via virtual branches and “financial towns” on platforms like The Sandbox, Decentraland or Axie Infinity. Having their brand in the metaverse enables banks to virtualize familiar financial interactions (e.g., withdrawing cash from an ATM, branch placement) and bring these to life in a more vivid and emotive way.

Here, South Korea is one of the most significant proponents of the metaverse with Seoul being the first major city globally to enter the virtual realm. Its Metropolitan Government invested 3.9 billion Won (US$3.2 million) into the “Metaverse Seoul” project to create a virtual communication ecosystem for all areas of municipal administration from 2023.

Enabling the metaverse

While most banks may not yet be conducting any “actual banking” in the metaverse, they do want to eventually monetize on their investments. Though any initial ROIs would be minimal, this is possible by enabling payment processing for game merchants, and offering the accounting and settlement engines for in-game transactions held in virtual currency.

Further opportunities could come from supporting the issuance of branded gift and prepaid cards, facilitating multicurrency purchases, and creating not only cross-border but cross-metaverse foreign exchange and liquidity solutions (i.e., not only across fiat currencies, but between fiat and crypto).
And with customers wanting an easy-to-use, unified view of their finances, there is an added role to create an all-in-one digital wallet experience by loading and managing all their financial assets in one place. This could include the integration of payment accounts in multiple fiat currencies, loyalty accounts, virtual currency accounts, non-fungible token (NFT) and other alternative payment methods popular among users in a metaspace.

Beyond being the payment rails, FIs can also offer embedded lending services much like in the physical world for credit, mortgages and rental agreements. This includes providing digital asset financing by leveraging their role as custodians of customers’ assets by securing, insuring and lending against NFTs, cryptocurrency and virtual real estate in the metaverse.

With NFTs and crypto currencies creeping into portfolios, asset management companies are also designing metaverse-themed investment opportunities for investors keen for investment exposure to companies linked to the metaverse ecosystem.

Huge potential

Many people might see the metaverse as a “wild, wonderful world.” However, there is no denying that it could turn out to be the wild, wild West instead. After all, the meta-economy hasn’t been developed fully and metaverse activities still come with heightened risks. However, while it’s challenging for FIs to base their business strategy on such an evolving, dynamic space, there’s limited downside in making incremental investments to engage early with ecosystem collaborators to build out their initial Web 3.0 presence with potential customers.

Whether cynics or advocates — we all need to be watching this potentially huge virtual universe more closely. It is indeed exciting to watch the metaverse unfold and influence the future of financial services.

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EY Asia-Pacific Banking and Capital Markets Leader