What is the Metaverse and Where do the Opportunities lay for Financial Services? 

by | Jul 13, 2023

Written by Nick Van Erp, Digital Consultant, Synechron 

Believe it or not, the Metaverse is not new. It’s been around for almost two decades, after first being introduced in 2003 but in recent years has begun to really establish its place in the digital world.

Whilst still growing rapidly, it has been flying under the radar somewhat due to other exciting developments like Generative AI stealing the headlines. As the Metaverse is gaining more popularity, we are seeing more businesses trying to associate themselves with the concept by claiming to be ‘in the Metaverse,’ which can create a misconception of what the Metaverse exactly is. So, before we go any further it is important to define what it is and, more importantly, what it isn’t. 

The metaverse is a gateway to digital experiences where users can seamlessly move between different digital environments and interact with other users and objects, in real-time, in a unified and immersive way. To give some examples from the gaming world, Roblox is considered part of the Metaverse, as it matches all the criteria. On the other hand, Fortnite, although displaying Metaverse traits, does not have the possibility to travel from one digital environment to another and it would therefore be incorrect to call Fortnite part of the Metaverse.The Metaverse combines all the latest digital innovations to create the most immersive and holistic experience possible: AI, machine learning, cryptocurrencies, VR, NFTs, and blockchain are among the technologies being utilized. However, all a user needs to explore the Metaverse is a stable internet connection and a mobile or desktop device, making the entry-level requirements negligible. However, for the full immersive experience the use of a VR headset is recommended. 

Although the Metaverse is not the first internet-based digital sandbox concept that mimics real-world experiences, its social component, real-time interactions and accessibility set it apart. The possibilities for innovation here are endless for wealth managers, asset managers, and other financial services firms. 

Opportunities for financial services Whilst the Metaverse is primarily associated with entertainment and gaming, the financial services industry can also leverage it to create new opportunities and enhance existing services. 

We’ve identified a number of opportunities for financial services in the Metaverse: 

· Facilitating transactions: One of the primary ways financial services companies can make use of the Metaverse is by creating new platforms for digital transactions. In a fully immersive digital environment, users can interact with virtual marketplaces, buy and sell digital assets, and participate in real-time virtual auctions. This can create a new source of revenue for financial institutions, as well as increase accessibility and convenience for consumers. 

Financial businesses can also use the Metaverse to create “virtual branches” where they can sell financial products to a new breed of digitally-native Gen Z consumers, or provide services to their existing customers. New Metaverse platforms like The Sandbox and Decentraland are gaining popularity, while more established gaming platforms with comparable functionality, like Roblox, can attract millions of users. Their audiences are digital natives and are keen to do business with companies that understand their enthusiasm for these virtual environments. HSBC, for example, purchased land in The Sandbox earlier this year, which it will use to engage with online sports fans and e-sports enthusiasts. 

· New investment frontiers: In addition to traditional financial transactions, the Metaverse can also be used to create new investment opportunities. Virtual real estate, for example, is a growing market in the Metaverse, with users buying and selling virtual land and properties for real money. To make it even more appealing, Metaverse real estate sales across all virtual worlds saw a 180% year-over-year increase in 2022, rising to USD 1.4 billion. Tokenization, which refers to creating unique digital assets, represented by tokens on a blockchain that hold value in the Metaverse, and investing in existing tokens, are other examples of how financial institutions can use the Metaverse to generate profit. Organizations can create investment funds that specialize in virtual assets, allowing investors to participate in growing markets and potentially earn substantial returns. 

· Better branding: As previously mentioned, the Metaverse is mainly associated with entertainment and gaming, and financial services companies should take advantage of this. Using the Metaverse as a platform for branding, through entertainment and gaming, is an amazing way to engage a younger customer base that usually has few touchpoints with the financial industry. Taking it one step further, the Metaverse is a great place to provide financial education and literacy to this customer base. South Africa-based Nedbank recently launched their Chow Town in the Metaverse, where players can run a restaurant. This educates users on how to manage a business and is a great way to engage a younger audience. 

But there are risks As with any opportunity, there are risks involved. Firstly, the potential dangers to users of the Metaverse must be addressed, such as loss of real-life social connections, addiction, and exposure to possible virtual crimes, such as identity theft and fraud. Businesses looking to benefit from the Metaverse must prioritize protecting users in order to create an optimal environment. For businesses, enforcing contracts and legal agreements in a virtual environment can still be tricky. They may also face reputational risks if they’re associated with unethical or controversial activities in the Metaverse. Lastly, there is the risk of cyber-attacks and data breaches. 

A new frontier of innovation and creativity In conclusion, the Metaverse represents a new frontier of innovation and creativity for financial services. Financial institutions can generate new sources of revenue, enhance existing services, and create a more engaged customer base with new platforms for digital transactions, investment opportunities, and branding. For example, it is not unlikely to soon see the first Metaverse traditional banking branches where users will be asking virtual banking employees, who are driven by generative AI, for financial advice and users would be able to take out virtual loans, mortgages and insurance policies for Metaverse assets. As the Metaverse continues to evolve, it will be exciting to see how financial organizations leverage this new digital environment to create value for both consumers and investors.

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