Why banks should care about the Metaverse?

The Metaverse for Banks is not just about providing banking services in a different form; it should play a part in a bank’s short- and long-term strategies

Over the last 12 to 18 months, the Metaverse has gained increasing attention across practically every industry. In this rich virtual space, participants from every corner of the globe and all walks of life can engage in persistent shared experiences that range from the real world to a fully virtual world, and everything in between.

At its core, the Metaverse is an amalgamation of 2D and 3D technologies from cutting-edge game development, augmented reality (AR) and virtual reality (VR) technologies, and the blockchain. Some have even likened the Metaverse to the next evolution of the Internet experience, enabling people to go beyond web browsing to active participation and even inhabiting it.

A Metaverse is a place where people can come together and interact as well as create, purchase, and sell digital assets like land, buildings, items, and avatars. Imagine visiting a shopping mall in virtual reality, watching a sporting event or boxing match, participating in an immersive meeting or conference, or meeting with a financial advisor at a bank branch – all without ever leaving your home. These are just some possibilities that the Metaverse can offer.

But for its ability to blur the lines between physical and virtual worlds, the Metaverse requires an economic system to function successfully. And this is where banks come into the picture. Given that the topic cannot be covered in one sitting, I will split this into three parts, with the first of the series covering the evolving landscape and why the Metaverse matters to banks.

A New Era For Banking

Before we delve into the potential of the Metaverse in banking, it is worth pointing out that banking has already undergone a seismic shift in recent years, fuelled by the emergence of new financial concepts and digital capabilities over the last few years.

Part of this can be attributed to the emergence of Web3, a new iteration of the decades-old World Wide Web that incorporates brand new concepts such as decentralisation and blockchain technologies. According to the World Economy Forum, Web3 presents an opportunity where people are not merely products or beneficiaries of tech business models, but builders and owners of digitally unique assets.

Indeed, Web3 has already led to the creation of a completely new economy, one that is borderless, secure, and quick – on par with traditional banking transactions. And because transactions are powered by blockchain technology, it is also highly decentralised without the need for intermediaries.

Elsewhere, a new virtual and creator economy has emerged in the wake of the enormous growth of cryptocurrencies, non-fungible tokens (NFTs), and central bank digital currencies, unleashing the market's potential for entirely new assets such as virtual real estate and digital art. As you can imagine, banks are actively collaborating with regulators to develop a strategy to address this nascent customer segment.

Banking In the Metaverse

As the Metaverse grows in popularity as the standard environment for people to play, work, and interact with one another, it represents an area that banks cannot ignore. As participation in the Metaverse mushrooms, the need for a reliable system to exchange value in it will similarly soar.

To properly grasp the Metaverse's potential in banking, it is necessary to first understand the components that work together to produce this digital replica of our existing reality. Technology, platform, marketplace, and commerce are what I see as the four distinct elements that make up the whole. Each of these elements has gone through its own evolutionary phase. Technology growth on areas such as Blockchain, AR/VR, AI, Human-computer interface is making a huge impact to give seamless user experience. Platform plays a major role in connecting the respective communities of interest (social media platforms are good examples). Marketplaces and e-commerce spaces also experienced monumental growth during the pandemic. Most tangible items are now available online.

It is worth noting that banks can already target customers in the Metaverse today. Banks can connect to prospective clients in already-existing open Metaverses through cryptocurrency wallets, and provide payments, lending, and custody services. Customers who want to purchase property in the metaverse can currently turn to firms such as TerraZero, which in January this year launched a metaverse mortgage service with loans offered for virtual real estate.

In Asia, the Industrial Bank of Korea (IBK) is anticipated to join the Cyworld Metaverse platform and provide a variety of financial products, such as an IBK "dotori" bank account, in the virtual market. This opens the door to new customer groups like creators, gamers, and artists who can benefit from services such as the combining of various income streams with instant loans, income smoothing, financial planning, concierge services, and other financial services.

Crafting A Long-Term Strategy

In the longer term, financial institutions may be able to envision and create a long-term strategy for the Metaverse thanks to the advancements already made in decentralised finance and NFTs. Unsurprisingly, more than half the international banks already provide platforms for custody, exchange, and digital assets that can be expanded to meet virtual world demands.

Banks may also consider the creation of their private Metaverses, or virtual world platforms, to support marketplaces and new products while connecting them to existing infrastructure. One additional area where banks should concentrate is identity management in the Metaverse. To improve risk management, compliance management, data protection, and fraud management, banks may benefit from using NFT-based identities with standards like ERC 725 (Ethereum Identity Standard) to better understand the Web3 activities of their customers.

Ultimately, banks must rationalise use cases to fit both the short- and long-term horizons of their strategies. And given the extraordinarily rapid pace of progress, targeted efforts are required to ensure early identification and implementation. For now, global banking executives agree that the realisation of Web3 over the next decade will fundamentally change the way companies engage with their customers online.

Within the Metaverse, centralised platforms and Web3 protocols are probably going to coexist. By enabling users to maintain a digital identity, exchange digital currencies, own persistent digital valuables like NFTs, and move digital objects from across the Metaverse, these protocols and systems can play a significant role.

The Future Of The Metaverse

What is novel about Metaverse is how varied components can be combined to produce an entirely new, more immersive internet experience. Some of these building blocks include:

• Converging device technologies
• Digital identity technology
• Multiparty systems and distributed computing technologies
• Abundant computing power
• Emerging protocols and standards
• Rapidly expanding bandwidth

The maturity of these building blocks varies, but even the emerging ones are developing quickly. For instance, VR headsets are arguably moving toward commercialisation and miniaturisation at the same frenetic pace as the smartphone industry.

While a full Oculus Rift VR system costs US$800 (S$1,100) in 2016; Meta is currently selling the much more compact all-in-one Quest 2 headset for US$399 (S$550) . And even Apple is rumoured to be working on a VR headset that will reportedly incorporate unheard-of high-resolution displays for a truly immersive experience.

Expect Metaverse developments to continue apace over the next five to 10 years, as companies address standards for platform interoperability, laws and ethical issues related to privacy, fraud, and IP ownership in this new digital realm. This will need to happen concurrently with meeting the demand for high-quality content and experiences and overcoming remaining technological barriers.

This sustained, rapid pace of change means that banks that fail to consider their Metaverse strategy today run a serious risk of falling behind. On the other hand, those already drawing up plans and conducting small-scale experiments will gain an invaluable first-mover advantage to scale up quickly as the Metaverse invariably cross the tipping point to mass adoption.

In the next article, I will cover the various opportunities for banks in the Metaverse and how banks can reinvent customer and employee experiences there.

?Selvakumar Esra is a Principal Engineer and Lead Solution Architect in the Middle Office Technology department at DBS.