Finverse: The symbiotic relationship between financial services and the metaverse

The initial forays of financial services companies into the metaverse were primarily driven by branding and visibility. However, this is expected to change as the metaverse becomes mainstream Image: Shutterstock

The financial crisis of 2008 led to a wave of innovation in the financial services industry, resulting in what is popularly referred to as FinTechs. Metaverse has become the next buzzword across industries ranging from retail, media & entertainment to financial services. The venerable JPMorgan Chase made headlines recently by setting up shop in the metaverse. Many other financial institutions have also been reportedly getting their metaverse strategies in place. The concept of metaverse or an ‘alternate reality’ in the digital universe is not new. It has been around for more than fifteen years, restricted mainly to gaming and social media. European financial institutions such as ABN AMRO and ING set up virtual branches in virtual reality platforms more than a decade ago, only to shut down soon. The initial forays of financial services companies into the metaverse were primarily driven by branding and visibility. However, this is expected to change as the metaverse becomes mainstream.

Will the metaverse drive the next wave of innovation in the financial services industry?

Much has been written about how the metaverse will enable the next phase of financial institutions. Virtual branches can provide consumers with a complete branch banking experience without stepping out of the comfort of their homes. Digital avatars will be available to provide personalised assistance 24x7. This will result in greater interaction time and the ability to upsell and cross-sell products. Influencers, who play a significant role in purchase behaviour, can interact with customers in the virtual branches and provide data-driven advice in real-time. Customer analytics, which previously was restricted to transactional data, can now include visual and spatial data as customer movements and interactions within a virtual branch can be monitored and recorded. The metaverse will enable a visual experience of financial services, something an entire generation of millennials has skipped.

How can the financial services industry take a leadership role in developing the metaverse?

Interoperability across the platforms
The financial services industry can play a much more significant role in the development of the metaverse beyond setting up virtual branches. They can take the lead in laying the rails to make the metaverse mainstream. Currently, the metaverse comprises several independent and decentralised platforms. These platforms leverage blockchain and artificial intelligence, with cryptocurrencies as the primary means of commercial transactions. The lack of interoperability across the platforms and cryptocurrencies has been among the hurdles in the growth of the metaverse. On the platform side, significant investments are being made by technology giants like Meta and Microsoft to make the metaverse interoperable. On the payments side, for the metaverse to move to a mass adoption phase, users will want to make payments in modes they are familiar with. Consumers and businesses rely on financial institutions to conduct trade and commerce. While the decentralised frameworks of blockchain and cryptocurrency appeal to a small segment of the population, a large majority of the global population still rely on the traditional payment methods for their day-to-day transactions.

Integrating existing solutions with the metaverse

Historically, financial institutions have followed their customers from branch banking to internet banking to mobile devices. As more and more industries converge on the metaverse, the volume of commercial transactions is projected to grow significantly. Various reports have projected this growth from $1.5 trillion (JPMorgan) to as high as $12.5 trillion (Goldman Sachs) by 2030. Financial institutions will need to step in and enable these transactions. Financial institutions, including banks, FinTechs and insurance companies, are expected to make forays into the metaverse in a phased manner. They can integrate simple to use and already interoperable solutions with the metaverse worlds to enable payments. However, this does not mean that cryptocurrencies will fade away. Cryptocurrencies offer distinct strengths, including lower transaction costs and higher transaction speed. We believe that the metaverse will help evolve the next generation of digital payments that combine the benefits of cryptocurrencies with the familiarity of traditional payments. The tie-up of payments giant Mastercard with three Asian cryptocurrency companies is an example of such an initiative.

Non-fungible tokens (NFTs)

The metaverse is expected to increase the volume of non-fungible tokens or NFTs where consumers are willing to assign value to digital assets. Financial institutions need to support the creation of a trustworthy ecosystem where a monetary value (whether in cryptocurrency or otherwise) is attached to a digital asset. Like ecommerce, financial institutions can play a significant role in enabling NFT-commerce and linking a chain of suppliers and customers.

Transparency and a supportive financial ecosystem

As the metaverse grows into an alternate universe, there will be a need for boundaries to be set for the smooth functioning of commerce. Ownership and title to assets will need to be transparent and trustworthy. The financial services industry can form a supporting layer for these global transactions. As an illustration, services such as bank guarantees and letters of credit could be developed using smart contracting technology. To be commercially viable, the metaverse will need to generate revenues beyond advertising and brand marketing. As with the case of many social media platforms, digital commerce backed by financial instruments can make the metaverse a viable and sustainable investment. The metaverse will require a strong regulatory and tax structure where consumers and businesses can operate with trust. All this is possible only with a supportive financial ecosystem.

The entry and growth of financial services in the metaverse is a win-win. The metaverse may never become a commercially viable proposition without sound financial infrastructure. On the other hand, the metaverse will force the next wave of innovation in the financial service industry, including new forms of digital currencies and digital contracting. Financial institutions must take the lead, along with metaverse developers, to create an interoperable ecosystem that will span the physical and digital universes.

[This article has been reproduced with permission from the Indian School of Business, India]