What Is The Metaverse And Why Would Banks Want to Explore It?

Although the term “metaverse” goes back to 1992, it’s only recently that the idea has hit the mainstream. If you’re still mystified and confused by the notion, that’s understandable – especially given that the concept is still developing and a fully-formed metaverse doesn’t even exist yet. To remove some of the mystery, Synpulse8 and the Institute of Financial Services Zug IFZ have co-authored a short paper entitled Metaverse Report: An overview of the current status and developments for the financial industry.

What is a metaverse?

To address the confusion we start with a definition: “A metaverse is a three-dimensional virtual world that focuses on social connections and is facilitated through the use of virtual and augmented reality technologies.” In other words, a metaverse is an evolution of the internet into a virtual world driven by new technologies enabling new kinds of human interaction. Figure 1 shows the components of a metaverse and how they fit together.

Figure 1: The structure of a metaverse (Source: Synpulse8 and Hochschule Luzern. Metaverse Report. June 08, 2022.)

What are the driving forces?

Because it creates new forms of interaction, the metaverse can potentially impact many areas of daily life. The main driving forces at present are big tech (think Facebook/Meta, Google AR and Microsoft Mesh), distributed ledger technology (you’ve probably heard of Ethereum, Decentraland, and The Sandbox), and the gaming industry (with names such as Fortnite and Minecraft). If it’s hard to imagine a universe pioneered by multiplayer games being a rewarding world for the serious business of financial services, think again. Strip it down to the basics, and what a metaverse actually is a fusion of the real and virtual worlds that creates a whole new channel for need satisfaction.

How do you satisfy needs through avatars?

People move around the metaverse in the form of a virtual digital representation called an avatar. It’s through these avatars that they satisfy their needs in the metaverse. And just as in the real world, in the virtual world there are different types of avatars with different needs and ways of meeting them. These needs include respect, status, freedom, and belonging. Why not financial security as well, or the need to express financial status? The development of metaverses makes it possible to continuously expand the range of products and services offered to satisfy users’ needs. But to do so, companies will have to understand the different types of avatar, what makes them tick, what needs they seek to fulfil, and how they go about doing so. 

Why does the metaverse need financial services? 

Financial services are still pretty scarce in the metaverse. But that doesn’t mean they won’t be needed. Many of the products and services offered in the real world could also find a use in the virtual world. Added to this is the fact that the real and virtual worlds need to be interoperable, which means that the real world remains the anchor point for the metaverse in terms of economic laws. Doing business in the metaverse may not be so different from doing business in a new geographic market with its own rules. 

What kind of financial services are we talking?

Supporting development and consumption in the metaverse will require a range of financial services. Citi predicts that metaverse finance (MetaFi) will combine decentralized finance (DeFi), centralized finance (CeFi), and traditional finance (TradFi), all of which adds up to diverse business opportunities for financial institutions. 

 Potential financial services in the metaverse fall into a number of categories: payments, investment management, and banking infrastructure. We’re already seeing the establishment of financial services in these categories. A category not yet established in the metaverse but well worth exploring is deposit and lending.  

Figure 2: Financial Services and the Metaverse (Source: Synpulse8 and Hochschule Luzern. Metaverse Report. June 08, 2022.)

Although a comprehensive metaverse doesn’t yet exist, according to various estimates it has huge future market potential. Citi foresees 1 billion people using VR or AR headsets in the metaverse by 2030. Other experts predict that the metaverse market will potentially be worth between USD 8 and 13 trillion by 2030. Whatever the case, engaging with the opportunities has to make more sense than sitting on the sidelines simply because the metaverse seems too intangible or difficult to grasp.

What about investing in the metaverse?

This potential also makes the metaverse attractive for investors, especially those wishing to reap the fruits of technological development. Given the difficulty of getting direct financial exposure to the metaverse, a good option is investing indirectly via providers of the necessary technologies. The study highlights opportunities in all the layers shown in Figure 1, from the physical to the content layer. One option that does exist is investing directly in metaverses based on DLT-based tokens such as MANA and SAND, digital asset tokens used to pay for goods and services in the Decentraland and The Sandbox virtual worlds.

What else is needed for broad adoption?

There are still challenges that have to be addressed in areas such as infrastructure and interoperability (ensuring low latency and interoperability between different virtual worlds), digital identity (identifying the people behind avatars), regulation and legislation (governing property rights, criminal law and data protection for users and providers), and the transactional system (a global system to map and exchange value). Once these requirements are met, the path will be clear to realize the immense potential of the metaverse.

Where do you stand?

From our explanation of the metaverse, where it’s headed and what’s involved, it should be clear that this virtual universe has enormous potential – for financial services as well. The metaverse is here to stay, and banks should start looking at the topic to understand how the metaverse works and how they could fit in. If you want to explore in more depth, we heartily recommend reading our study ((link)). And contact us if you want to discuss ways Synpulse8 can help you stay ahead of the metaverse curve.