There are several definitions of the Metaverse. Meta Platforms Inc’s CEO Mark Zuckerberg (Facebook became Meta Platforms last October) described it as “an embodied internet where instead of just viewing content – you are in it”.

We define the Metaverse as a combination of the following:

• Interconnected virtual worlds or ecosystems that imitate real-world characteristics using technology (e.g., virtual reality, augmented reality, 5G, haptics (aka 3D touch) and edge computing).
• Virtual representations (avatars) of humans, together with their (verified) credentials and assets that they own.
• Interactions and experiences of these avatars.

For this definition, we have not associated distributed ledger technologies (DLT) with the Metaverse. Gaming focussed virtual worlds (e.g., Fortnite, Minecraft) have existed for many years and have millions of users today. They are (largely) not built on DLT; however, the more recently created Metaverse ecosystems (e.g., Decentraland, Sandbox) utilise Web3 and decentralised finance concepts. These ecosystems are in their relative infancy. For the future, we might see the different Metaverse ecosystems being interconnected to allow users to seamlessly move across one another.

Gaming remains the biggest use case for the Metaverse. However, several scenarios indicate how the Metaverse could be used, and some are already being applied. These include:

• E-commerce transactions propelled by an immersive 3-D environment compared to the 2-D internet experience of today;
• A more effective product design and testing ecosystem;
• Remote collaboration;
• Virtual events and conferences;
• Virtual travel experience;
• Virtual learning and training; and
• Virtual health services.

And the above is just a subset of what one can easily imagine – the existence of digital twins between the real world and the Metaverse opens enormous possibilities.

Market estimates vary as to the value that the Metaverse will create. They range from US$8trn–13trn as predicted by Citibank,¹ to McKinsey’s estimate of up to US$5trn by 2030.² Significant investment in Metaverse has poured in more recently. Most notably, Meta Platforms committed to invest US$10bn in its Reality Labs division (as stated in the Facebook Q3 2021 results),³ and Microsoft’s proposed takeover of Activision Blizzard, announced in January is, at US$70bn,⁴ the largest ever tech acquisition.

“The Metaverse will change the e-commerce experience”
Sabih Behzad and Akash Jain, Deutsche Bank

The Metaverse will change the e-commerce experience by making the virtual experience more personal, more real, and more immersive. The experience will be characterised by ultra-personalisation and user-designed products, going beyond just product recommendations offered on the internet currently. Retailers who provide a winning personal experience would be entitled to charge a price premium. User returns, estimated by CBRE Supply Chain to be 30% during 2021 holiday season⁵, would reduce as users ‘try’ the product virtually or see how a particular furnishing might fit in their homes using augmented reality. There is likely to be much higher (virtual) footfall as users can go into stores at the click of a button and stores could attract custom in ways not possible within the constraints of the physical world (for example, watching an exclusive live show at the store). Furthermore, tokenised assets (primarily non-fungible tokens) opens up markets that did not exist previously. Fractionalisation and programmable money could drive even more transaction volume.

McKinsey estimates the market impact of the Metaverse on e-commerce at US$2.0–2.6trn by 2030. This impact is driven by transactions that require payment services to be supported by the financial institutions. The core services would broadly need to cater for two scenarios:

• Support transactions on Web 2.0 Metaverse ecosystems that are not built on DLT, but sometimes utilise DLT assets (such as non-fungible tokens (NFTs)). Examples include in-game app purchases on Fortnite or Roblox, which have significant volumes.
• Supporting transactions on Web 3.0 Metaverse ecosystems that are built using blockchain-based tokens and need conversion between these tokens and fiat currencies. As an example, Decentraland, which is built on the Ethereum blockchain, allows users to buy plots of lands (as NFTs) using its native currency MANA. One way to buy MANA is to make a payment of ETH (Ethereum’s cryptocurrency) via an exchange and store it in a browser-based wallet. Obtaining ETH requires a fiat to cryptocurrency transaction using an exchange

“NFTs play a critical role in the Metaverse”
Sabih Behzad and Akash Jain, Deutsche Bank

Core solutions to support the non-token payment flows already exist (i.e., current payment rails). However, there are still opportunities for providing solutions to close the sales loop directly on the Metaverse. Moreover, driven by both the user volume and transaction volume, the e-commerce transactions are likely to also grow on the Web 3.0 Metaverse ecosystems. Solutions, integrated in the Metaverse with the required scale and low transaction costs, are needed for token transfers and token-fiat currency exchange. NFTs play a critical role in the Metaverse, providing the rights for digital ownership and provenance of purely digital assets as well as digital twins (i.e., a digital asset with a physical world equivalent). Beyond the core solutions, we are also likely to see financial services players offering financing and lending solutions.

Payment providers and fintechs have invested in and started to offer such services. American Express seeks to engage in virtual payments and electronic business transactions for digital media and NFT. PayPal allows users to buy, sell and hold crypto. Stripe’s new application programming interface allows businesses bi-directional fiat-crypto conversion, including KYC and identity verification. Mastercard has announced that it is working with NFT marketplaces to allow NFT purchases.⁶

Like any innovation cycle, several key challenges will need to be addressed to realise the Metaverse’s full potential.

1. Regulatory frameworks and solutions are required to adequately deal with data privacy, digital safety, financial crime and digital identity. Issues around censorship/ content standards and potential IP need to be resolved.
2. Interoperability across the Metaverse ecosystems is required for users and their assets to seamlessly navigate these ecosystems (e.g., a digital identify that can move across).
3. Metaverse is predicated on the evolution of technology to enable a 3-D, immersive experience without it being clunky.

The Metaverse has initiated a trend that provides many opportunities for financial services ecosystem. Much work is still required before we reach maturity, but leading participants are already starting to build capabilities, experiment and learn how to fine tune these offerings.

Sources

¹ See ir.citi.com
² See mckinsey.com
³ See s21.q4cdn.com
⁴ See sec.gov
⁵ See cbre.com
⁶ See mastercard.com