Banking lost in translation: into the metaverse

14/06/2022 interview

Dr. Martha Boeckenfeld, Board Member at GenTwo, discusses what the Metaverse truly represents for the future of financial services.

What is the Metaverse?

Simply put, it’s the the future of the internet: A massively scaled persistent, interactive and interoperable real-time platform comprised of interconnected virtual worlds and reality, where people can socialize, work, transact, play, and create.

Does the Metaverse exist yet? Not quite- for now the fully immersive and interopable version is a vision. However, the seeds are sown—and  it’s just a matter of time.

There are however already different types of metaverse use cases- so called the “Multiverse “, to explore, and although they are similar in offering, they all slightly differ (think of it like the fizzy drinks category – Coca Cola and Pepsi offer similar drinks, but you can taste the difference).

How can you access the Metaverse?

You can access these different types of metaverses in different ways. Owning a computer or console allows you to visit metaverse-like experiences on gaming platforms such as Fortnite or Roblox, which acts as an online playground. Whereas owning a VR headset allows you to become fully immersed in the world around you- they also strech beyond the gaming crowd attracting new particpants to these platforms. 

Another use case of the metaverse is a platform called Decentraland (and a number of other, who build land), which you can access on your computer. You can create your own avatar and experience this virtual world just like our own. With its own currency, you can buy land, sell items and experience the digital marketplace. We have seen major developers , banks like HSBC and Standard Chartered Bank, JP Morgan, fashion brands running into the metaverse buying lands and building stores even organising the FashionWeek and selling their products in form of NFTs (non-fungible tokin) to attract new sales among a very new niche audience – digital savvy gamers and block-runners (passionate players on all blockchain related things). 

What are the value drivers of the metaverse?

The framework of the metaverse that best describes the value-chain is based upon  on Jon Radoff’s seven tiers model. This  include opportunities, technological innovations and solutions to our current problems. 

Infrastructure is the base layer, meaning that without adequate framework none of the other developments are possible. This is why technological processes are at the heart of the metaverse. The other tiers include experience, discovery, creator economy, spatial computing, decentralization and human interface.

How much Metaverse market appetite will there be in the banking/insurance industry in the upcoming 5-10 years?

Last year, Morgan Stanley called the Metaverse «the big theme in investing». As the metaverse is being shaped, blockchain and crypto are increasingly getting pulled into the picture and incumbents don’t want to miss out and risk intermediation. Metaverse token prices are rising – Decentraland and Sandbox’s Sand were among the top 10 best-performing cryptocurrencies in 2021, according to analysis from CoinMarketCap. The recent Citi report talks about a $13 Trillion opportunity by 2030. The Russian war against Ukraine has demonstrated the importance of crypto for cross boarder payments and support in war times, catapulting crypto payments into the mainstream. 

For decades, a lack of innovation has challenged the banking sector. The big news in February 2022 with JP Morgan opening a lounge in the blockchain-based virtual world Decentraland and claiming to be the first major lender to enter the metaverse came to some banks as an awakening. Since than  HSBC joined JP Morgan betting on a future in the metaverse- HSBC said it would join the metaverse through a partnership with the Sandbox platform. The bank will be buying a plot of digital land in the virtual world and center it on sports, e-sports, and gaming. 

Banks have started to immerse in the virtual world and adapt their experiences to match those, which are already available in the different gaming and virtual real estate world such as Decentraland and Sandbox. Insurers will need to think about the experiences of their customers and employees and the inherent risk to cover with insurance solutions. Among other things, clients and agents could meet up in the metaverse for consultations. But the metaverse also presents totally new risks that need to be covered and will demand new insurance solutions. For instance, every time users buy virtual currencies and digital assets, they receive confirmation proof, possibly in the form of a token. This presents the risk of people hacking into digital assets.

For Banks and Insurers it is time to begin thinking about the metaverse landscape in 2022 and beyond. If your company hasn’t kicked off its strategic planning process for 2022, it is time to start. If the metaverse is not on the list of things to assess, it should be.  

The components of the metaverse continue to accelerate, making it very difficult to base a long term business strategy, but rather act quickly and be prepared to test and fail. 

What are the main security risks associated with the adoption of this technology? How can one ensure that they are addressed?

The biggest asset of any brand and in particular for financial insititutions is: Trust. The old rules for achieving trust in your transactions, assets, data, brand experience and more may not apply in the metaverse. As the metaverse is being developped, it will be essential to think ahead, be innovative and work with partners, who are more advanced in the different fields. 

    1. Check your risk exposure and act

The recent Terra/Luna stablecoin « massacre » makes consumers more worried to use crypto as they might not understand the reasons and how to protect themselves.  In March 2022, Hackers stole about $600 Million USD worth of cryptocurrency from a blockchain network called Ronin which supports one of the biggest Non-Fungible Token (NFT) games, Axie Infinity. 

Enhancing all three lines of defense (the business, risk management and internal audit) with the skills needed to verify transactions and regulatory compliance for digital assets will be key. For financial assets, this defense should likely include hardware-based security for crypto wallets as well as teams that can audit smart contracts to spot flaws, vulnerabilities or hidden exploits. As part of this new expsoure, consider new partnerships- you may wish to engage trusted third party experts to help provide additional control and verification. 

    2. Navigating an interoperable metaverse: Update data strategies

Financial insitutions need a new approach to data gathering, governance, analytics and security — one that can follow stakeholders wherever they go, while protecting their privacy and inspiring the trust that encourages data sharing. This approach should include clear rules, especially for consent, so your users understand who is using their data and for what purpose.

    3. Governance within the metaverse: Rethink security

A new, less centralized digital world will likely offer new attack surfaces for malicious actors, including on connecting devices such as wearables. Three-dimensional experiences could make some cyberattacks even more dangerous. New kinds of metaverse-specific crimes are also emerging, such as “pump and dump” NFTs and other fraudulent metaverse investments involving project-specific crypto tokens.

    4. Do you know your customer: Rethink identity?

In the metaverse, users are supposed to own their digital identities, complete with data, history and assets, which they can use anywhere. Consumers will need support to decide what aspects of their identity to share — permitting them to be anonymous or pseudonymous or they might trust a financial insitutions to keep them. Consumers will certainly need to understandt that, if financial instutions lack control over key stakeholders’ digital identities, it will be more difficult to protect them from phishing and other fraudulent activities. 

    5. What happens in the metaverse: Protect against misinformation and abuse

When your stakeholders enter your virtual spaces, they’ll be expecting you to protect them. If they suffer from abuse or misinformation within your metaverse environment, the company will pay the price.

    6. The persistent metaverse: Build trust for when no one is looking

Virtual activities, investments and presence can work as expected in this persistent digital world, you need to rethink digital services, monitoring and controls beyond.

“What happens in the metaverse, does not stay in the metaverse”. 

What are some of the tactics financial institutions have used to identify metaverse clients? What types of new products/services could or have been developed to leverage client engagement?

The metaverse is how people will experience Web3, which is the next generation of the Internet—using immersive technologies like augmented reality, virtual reality and extended reality. Suresh Balaji, HSBC’s CMO for Asia Pacific, advised, why the bank invested in The Sandbox:

“At HSBC, we see great potential to create new experiences through emerging platforms, opening up a world of opportunity for our current and future customers and for the communities we serve. We make our first foray into the metaverse through our partnership with The Sandbox.

“We truly see that virtual reality, augmented reality technology and all of these new three-dimensional interfaces will gain mass adoption at some point. HSBC has always been invested in communities. Gaming creates huge communities.”

Another avenue is taken by Klarna- Klarna a leading global retail bank, payments, and shopping service announced the launch of its Virtual Shopping offering, bringing the in-store experience to online shoppers everywhere. 

The metaverse also provides a new way to facilitate the trading of digital assets such as NFTs and cryptocurrencies, the total market value of which already is more than $2 trillion dollars. 

PayPal recently launched a new ‘super app’ and outlined its vision to become a digital wallet platform, not just a payment app. And, outside of the traditional payments sector, many other organizations, including big techs and platform players like Samsung, Facebook/Meta, and Rakuten, have developed their own propositions Facebook rolled-out a pilot for its own digital wallet, ‘Novi.’ Meanwhile, Rakuten, which launched its digital wallet back in 2017, recently announced a new service to top up Rakuten Cash (online e-money issued by the Rakuten group) via cryptocurrency and make payments at on/ offline merchants such as 7-Eleven.

With digital wallets becoming a focal point of digital asset trading and having the potential to become a form of digital identity, financial institutions should consider building a strong position in digital wallets and pursuing the associated opportunities. 

Do you expect it to be almost exclusively utilized by younger demographics? How can one make sure such technology is also broadly adopted by Gen Xers and baby boomers?

Microsoft research revealed that half of the younger population are ready to work in the “metaverse” within just 2 years!

The typical metaverse user is young – for example, 80 percent of Zepeto users are teenagers, and 54 percent of Roblox users are less than 13 years old. The metaverse is primarily inhabited by Generation Z, and most of its remaining users are millennials, a digitally active group who spend a considerable amount of time online and are more likely to be cashless and attracted by digital currencies. Expansion of the metaverse will likely increase the significance of millennials and Gen Z consumers as an important customer base for financial institutions and accelerate the transition into financial services products designed specifically for a new generation. 

Working and learning in the metaverse will increase the adoption of all ages- as people familiarise themselves and enjoy the experience. While the metaverse will play a positive role in bringing communities together, unleashing personal creativity and making experiences more accessible by eliminating distance, it’s not a utopia. When investing in immersive experiences or planning their presence in the metaverse, brands should be mindful of a deepening digital divide: not everyone in the global community will have access to the immersive technologies and connectivity required to engage in these experiences, and many in the developed world remain “unbanked” and unable to rely on digital payments. 

Success and responsibility in the virtualized era will require brands to carefully consider the roles they play in society—either in building distinct digital experiences that deliver on brand promise or leveraging their resources to help a broad base gain access to such experiences. The metaverse won’t only be built by brands; it will thrive on user creativity, and brands are optimally positioned to support artists, creators and communities in building this space togegether. 

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