Suneet Muru is an analyst in GlobalData’s Thematic Intelligence Team and joined in September 2022. He specialises in cryptocurrency, blockchain, and the metaverse.
Lara Virrey: How can the metaverse help banking & payments companies meet some of the sector’s challenges today?
Suneet Muru: The metaverse can potentially address challenges faced by banks, especially ESG, demographics, and financial inclusion. When it comes to ESG, the impact of the metaverse on banks’ efforts is a double-edged sword. Some of the metaverse’s enabling technologies, such as augmented reality (AR) and virtual reality (VR), help promote the adoption of virtual meetings, which can have substantial environmental benefits, as workers can forego long journeys that generate greenhouse gases.
Some other enabling technologies have adverse environmental impacts. For example, semiconductors require rare earth elements, some of which are mined in very fragile habitats. For banks, the environmental impact of cryptocurrencies may be of particular concern, but it is worth noting that the narrative largely pertains to bitcoin, which currently has a very limited role in the metaverse.
Socially, there are concerns over data privacy and the safety of users. The lack of regulatory oversight in the metaverse heightens the risk for banks in facilitating money laundering, identity theft, and other illicit activities. However, the metaverse has also served as a venue for banks to promote their ESG initiatives. For example, in September 2022, DBS purchased a 3×3 plot of virtual land in The Sandbox to launch SingaporeVerse. This distinct neighbourhood is being used to share information on DBS’ ESG efforts and promote so-called social entrepreneurs that generate a positive social impact.
Another way that the metaverse can help banking and payments companies is by focusing on demographics. Gen Z and tech-savvy experts are early adopters of metaverse technologies. Therefore, banking and payments companies should target those demographics in the metaverse with marketing campaigns. OCBC, for example, launched an experience in Decentraland called OCBCx65Chulia, taking its name from the address of the bank’s headquarters on Chulia Street in Singapore. It allows visitors to learn about OCBC’s historical milestones.
Platforms offering a smooth user experience will attract more Gen Z users. Closed metaverse platforms have gained popularity among younger generations. Games like ROBLOX and Minecraft have redefined the criteria for a game’s success, emphasising the significance of branding and UX over graphical capabilities. The existing range of open metaverse platforms is occasionally perceived as clunky or suboptimal compared to other games available in the market, which will deter users from all generations.
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Finally, the metaverse can help banking and payments companies through financial inclusion. By providing a virtual shared space accessible to anyone with an internet connection, the metaverse can break down geographical barriers and allow individuals from underserved or remote areas to access financial services, learn about financial concepts, and participate in digital economies.
The metaverse’s financial inclusion narrative largely comes from play-to-earn blockchain-based games, the most popular being Axie Infinity. While the game helped Filipino residents accumulate significant wealth during Covid-19, the game also suffered from the 2022 crypto-crash, which almost entirely wiped-out users’ savings. Effective crypto regulation will be required before the open metaverse can provide a sustainable income.
The metaverse also highlighted the need for young children to learn money management skills early in their schooling. Fidelity introduced numerous financial education offerings in Decentraland and Roblox throughout 2022 and 2023. Furthermore, Ally Financial created Fintropolis for Minecraft in 2021, and IGN Groep created IGN City for Roblox in 2022. Both Ally and IGN have established more immersive city experiences for their financial education offerings, playing to the respective strengths of each platform.
Lara Virrey: What are the most promising applications of the metaverse in the banking & payments industry?
Suneet Muru: Banking and payments companies have a unique opportunity to develop infrastructures that capture a portion of the value flowing through metaverse economies. The metaverse is still in its infancy; therefore, the current range of financial services enabling its operations is limited to intermediation, on-ramping and off-ramping, metaverse mortgages, and cryptocurrency wallets. As the metaverse matures, an exhaustive set of financial products and services will be required to support its activities.
While no banking and payments companies have yet created cryptocurrency wallets specifically for the metaverse, they have the potential to enter the wallet market or release crypto custody services due to their strong branding and natural prowess in creating smooth user experiences. Both Stripe and Mastercard have released Web3 payment solutions. In addition, the media reported in January 2023 that BNY Mellon plans to offer a custodial crypto service for tokenised securities and crypto assets in Asia.
Lara Virrey: Who are the leading banking & payments companies in the metaverse right now, and why?
Suneet Muru: The metaverse is a nascent theme, so except for crypto companies, the potential to offer financial services in the metaverse is largely unexplored by banks. However, some specialist vendors have explored wallets, tokenisation, mortgages, and Web3-based payment solutions in the context of the metaverse. These companies include ConsenSys, Developcoins, Security Tokenizer, TerraZero, Transak, ad Xsolla.
Most banks are instead using the metaverse as a new channel to promote and facilitate physical world operations. The “fear of missing out” has resulted in a built-up release of virtual branches and offices that have failed to attract significant usage, partly due to a suboptimal user experience of the platforms they occupy. Leading banking & payments companies adopting the metaverse include Citigroup, DBS, Deutsche Bank, Fidelity, HSBC, ING Groep, JPMorgan Chase, KEB Hana Bank, Klarna, La Caixa, Mastercard, NatWest Group, OCBC, Standard Chartered, and Worldline.
Lara Virrey: What are the barriers to implementation of the metaverse in the banking & payments industry?
Suneet Muru: Cybersecurity is a large barrier to a bank’s success in the metaverse. The metaverse will form part of the digitally interconnected system that makes companies more vulnerable to cyberattacks, which virtual worlds in and of themselves cannot prevent.
Blockchain-based metaverse platforms pose the biggest cybersecurity threat. The interoperability of cryptocurrencies is largely facilitated by cross-chain bridges, which connect blockchains and allow users to send crypto from one blockchain to another. However, bridges feature a central storage point of funds and often suffer from poor design, testing, and auditing, making them particularly vulnerable. Security issues have made cryptocurrencies a target for heists, where hackers steal millions of dollars’ worth of customer holdings. In March 2022, popular metaverse platform Axie Infinity had $625m stolen from Ronin, its Ethereum-based blockchain.
In any case, a bank’s success in the metaverse will depend on the theme’s ability to attract a substantial user base, which is still largely uncertain. In October 2022, it was reported that Decentraland had only 38 active users in a single day. In addition, Meta’s Horizon Worlds has faced ridicule in the media for its proposed user experience, notably the initial absence of legs on avatars. While the metaverse has yet to gain mass acceptance, it could gain traction in the future. Those banks that guess wrong or decide late risk alienating current or prospective customers.