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Banking On The Metaverse

Sudhir Pai
15 Mar 2022

Sudhir Pai, Chief Technology & Innovation Officer, Financial Services SBU at Capgemini.

In the few months since the announcement by Meta (erstwhile Facebook), the metaverse has witnessed its own accelerated maturation curve, with an initial upheaval of activity, heightened expectations, cynicism from certain market sections and now a flurry of companies filing trademarks and patents to protect their piece of the pie.

Bloomberg Intelligence expects more organizations to jump on the bandwagon, pushing the market size to $800 billion by 2024. With associated markets also evolving (NFT market cap is currently above $41 billion, $54 billion has been spent on virtual goods in 2021, etc.), the virtual world will soon become a natural habitat in near future, necessitating enterprise investments for customer engagement. In fact, Gartner predicts that by 2026, 25% of people will spend at least one hour a day in the metaverse for work, shopping, education, social and/or entertainment.

At Capgemini Financial Services, we have characterized the metaverse as a new economy, an entirely new business paradigm fueled by the combinatorial effect of the evolution of different technologies. At its core, the metaverse is built on the foundations of immersive and decentralized technologies. While decentralized technologies like Web3, DLT and NFTs provide a robust and resilient infrastructure and value exchange mechanism, immersive technologies like AR/VR, haptic technologies and spatial technologies deliver a persistent and enhanced virtual user experience.

Before taking a deep dive into the metaverse, it’s important for banks to look at the evolution of banking and their maturity levels through the following stages:

Traditional banking: This is a two-tier banking model governed by central banks that relies heavily on one-on-one customer interactions in the physical space. Traditional banking—including the breadth and depth of banking services across retail, commercial and wealth—was heavily manual and paper-based and lacked the customizations and personalization of products and services.

Digital banking: The digitization of banking services accelerated in the past decade or so and can be tracked in two categories. First, the digitization of existing processes, making them available through internet and mobile channels. Second, building entirely new customer journeys, keeping digital and data first in mind. During this stage, banks operate like a tech company offering an improved customer experience, customer engagement and customer operations.

Open and beyond banking: In the past three to five years there have been significant developments in banking as a service, where banks can seamlessly connect and offer third-party services through APIs, thanks to regulations like PSD2 and GDPR. As a result, we now have many digital-only banks, neobanks and more cross-industry marketplaces offered by banks (e.g., energy services, health services, buying and selling automotives, home concierge services, etc.).

Decentralized finance: Over the past two years, blockchain technology, particularly with the advent of Web3, has given rise to an entirely new economy that is borderless, secure, fast (at par with traditional banking transactions), and getting more and more decentralized (without intermediaries). A huge uptake in crypto, NFTs and central bank digital currencies has led to a new virtual and creator economy by unlocking the potential of entirely new assets in the market like art, real estate and gaming. Traditional banks now have to build a strategy to address this new segment of customers and at the same time engage regulators proactively.

Metaverse banking: In the past six months, the metaverse has gained market traction across industries, including the banking sector as well. While the metaverse bridges the physical and virtual worlds through innovations in hardware and software, it also needs an economic system to thrive. Here is where we will witness NFTs taking center stage to unlock value in the metaverse (MetaFi). As the metaverse becomes the norm to play, work and socialize, demand for a trusted mechanism to drive value exchange in the metaverse will shoot up.

To truly understand the possibilities of the metaverse for banking, one needs to first comprehend what constitutes a metaverse, what the building blocks are that together create this digital twin of our current reality. To this end, we believe there are four distinct pieces to the puzzle: technology, platform, marketplace and commerce. Each one is powered by a unique set of ecosystem players having undergone their own unique maturation curve.

Short-term (less than 12 months) strategy for banks: This can take multiple approaches. One is to focus on engaging customers in the existing open metaverses. Banks can identify potential customers, onboard them through crypto wallets, and provide payments, lending and custody services. TerraZero offers “Metaverse Mortgage” for clients who wish to buy real estate in the metaverse. Industrial Bank of Korea (IBK) is expected to enter the Cyworld metaverse platform to offer a range of financial products in the virtual market, such as an IBK “dotori” bank account. It’s also an opportunity to address new customer segments like creators, gamers and artists—aggregating multiple sources of income, instant loans, income smoothing, financial planning, concierge services and more.

Mid- to long-term (over 12 months) strategy for banks: The progress already made in the realm of decentralized finance and NFTs can enable financial institutions to imagine and strategize a long-term plan around the metaverse. Most global banks already offer digital assets/exchange/custody platforms that can be extended to support the requirements of the virtual world. Banks can consider developing their own virtual world platforms (a private metaverse), enabling new products and even marketplaces and tying them back to traditional infrastructure. Identity management in the metaverse is another area where banks should focus. NFT-based identities with standards like ERC 725 can help banks better understand their customers’ Web3 activities, which can in turn help with better risk management, compliance management, data protection and fraud management.

While it might be tempting to dismiss the metaverse as yet another fad, the opportunity cost might mean being rendered obsolete in a rapidly evolving market. Banks need to rationalize use cases aligned to their strategies across both short-term and long-term horizons. Given the speed of progress, dedicated efforts will be needed to ensure early identification and action.

This originally appeared on Forbes magazine

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