Into the Metaverse

Processors are hoping to tap commerce, and hence payments, in the world of virtual reality. But as the metaverse keeps evolving, what kind of payoff can they expect? 

If you’re aware of the metaverse but are not exactly sure what it is and how commerce in it will work, you’re far from alone.

Is the metaverse a gaming platform that combines social media and virtual and augmented reality to enable users to engage digitally? Or is it the next iteration of the Internet, an immersive, virtual 3D world where consumers can create avatars of themselves that can shop, attend concerts, have access to banking services, and purchase virtual real estate, in addition to interacting with others?

In actuality, the metaverse is a combination of all those things. But above all it’s a virtual alternative to the physical world where consumers, through a virtual “self” called an avatar, conduct commerce and other activities that mirror the physical world.

The combination of those attributes, and the virtual world’s potential to become a disruptive technology platform that can impact the virtual and physical worlds, are what has drawn tech companies to invest in creating their own metaverses. And it‘s enticing retailers and financial institutions to set up shop in the metaverse.

Already, several prominent retailers such as Tommy Hilfiger, Louis Vuitton, Nike, and Gucci have opened metaverse stores to capitalize on the commerce taking place beyond the purchase of games or game tokens.

From a retail perspective, the most common goods being sold in the metaverse include digital fashion items for users’ avatars, such as clothing or accessories, along with digital art, according to Dani Rutz, a senior research analyst at The Strawhecker Group, an Omaha, Neb.-based payments researcher and consultancy.

Other unique offerings that generate commerce include live events, such as fashion shows or concerts, and tickets to real-life events.

“The metaverse provides a more immersive shopping experience for consumers,” says Rutz. “Within this context, large retailers are courting affluent demographics and can advertise a greater volume of products and make it easier for consumers to pay for them.”

In addition to generating commerce, the metaverse offers merchants opportunities that aren’t possible in the physical world. These include the abilith to engage consumers through new and immersive experiences that can create more commerce opportunities for their businesses.

Watch manufacturer Timex Group USA, for example, has partnered with the Bored Ape Yacht Club, an NFT collection, to create 500 limited-edition physical timepieces that have digital twins for a buyer’s avatar to wear in the metaverse. NFTs are digital assets that can be bought and sold, but which have no tangible form of their own. The digital tokens can be thought of as certificates of ownership for virtual or physical assets.

The watches were reportedly selling for about 2 Ethereum, a cryptocurrency, or about $2,500. Timex says the partnership is a way to allow the Bored Ape Yacht Club NFTs to mirror a physical product that has real-world value. The initiative also pushes the boundaries of physical, virtual, and “phygital” products—the integration of physical and digital elements in a single shopping experience.

“Blending virtual and augmented reality enables businesses to promote their brands and engage their customers through new and immersive experiences, and ultimately to create more commerce opportunities for their businesses,” says Girish Narasimha Raghavan, vice president of engineering for the big processor Fiserv Inc.

‘New Monetization Models’

The potential economic impact of the metaverse is huge. McKinsey & Co. estimates this new world could generate up to $5 trillion in economic impact by 2030, which is equivalent to the size of Japan’s economy, the world’s third-largest.

More specifically, McKinsey estimates the metaverse has the potential to generate between $2 trillion and $2.6 trillion in e-commerce sales by 2030. the firm forecasts a $108 billion to $125 billion impact for the gaming market alone.

That’s a lot of potential new volume for processors and financial institutions. No wonder some major banks, such as J.P. Morgan Chase & Co., are aggressively establishing a presence in the virtual world.

The attraction of the metaverse for financial institutions lies in the vast possibilities it offers for new transactions in retail, gaming, and real estate. Yes, real estate can be purchased in the metaverse. One consumer reportedly has already paid $450,000 to purchase a plot of virtual land in The Sandbox, a metaverse platform, next to rapper Snoop Dogg’s virtual residence, according to McKinsey.

In February last year, J.P. Morgan launched the Onyx lounge in Decentraland, a metaverse platform that supports purchases and user engagement with brands and games. The Onyx lounge is a destination where user’s avatars can go to learn more about the Onyx organization, J.P. Morgan’s dedicated blockchain unit, and about opportunities for businesses to enter the metaverse.

In conjunction with the launch, the bank published a whitepaper describing opportunities businesses can explore in the metaverse. “The whitepaper is meant to be a conversation starter with J.P. Morgan Payments clients as we help them understand and navigate the metaverse and apply possible payments use cases,” says a J.P. Morgan spokesperson.

The bank’s strategy includes an investment of an undisclosed sum in Tilia, a payments provider specializing in the metaverse. Tilia’s platform, which is built for game, virtual-world, and mobile-application developers, handles payment processing, in-game transactions, and payouts to content creators. It converts in-games tokens to fiat currency, including dollars.

“As consumers spend a greater portion of their time in video games and seek ways to gain ownership of the in-world items, new monetization models are emerging and require the right solutions,” the spokesperson says. “Tilia has longstanding credibility in gaming and provides a market-leading solution. We see this investment as an important milestone in our strategy for this sector.”

Digital Currencies

Another payments opportunity springing up in the metaverse lies in digital currencies proprietary to the platform provider. Decentraland, a 3-D digital game built on an Ethereum-based metaverse, has created its own in-game currency called MANA.

The money can be purchased with cryptocurrency. Decentraland’s commerce strategy reportedly is built on providing users ways to monetize their content and applications, which gives them a sense of ownership.

In addition to supporting its own currency, Decentraland launched a virtual ATM on its platform that enables users to buy MANA or other cryptocurrencies using fiat currency.

Meanwhile, Roblox, an online-game platform and game-creation system, has also developed its own digital currency, called Robux, which can be used to buy new games, private servers, and other goods on the Roblox platform.

Robux can be purchased or earned by creating a game within the platform. In this instance, creators earn a portion of the Robux paid by users to play the game. Digital currencies such as MANA and Robux are platform-specific to their respective metaverses.

Goodbye, ‘Dumb Pipe’?

When it comes to the economic potential of the metaverse, the big question facing processors is, who will control the merchant and app-developer relationships, the platform provider or the processor?

In the opinion of some payments-industry observers, metaverse-platform providers will be the ones to control those relationships initially, just as Apple and Google do in their respective app stores.

Under the app-store model, the platform provider controls the relationship with the developer, which means it sets the fees developers pay on each sale generated and funnels all app purchases and subscription payments through the platform’s in-house payments system.

Apple, for example, charges a commission of up to 30% on App Store purchases, including in-app purchases. Out of those revenues, Apple reportedly pays the processor that handles those transactions 2% to 3% of the transaction total out of the merchant fees it collects.

Because Apple controls the relationship with the developer, the processor essentially serves as a simple pipe unable to sell any value-added services, points out Aaron McPherson, principal at AFM Consulting Partners. McPherson argues the app model could serve as the blueprint for how metaverse platforms can earn revenue from payments and control merchant relationships.

“Apple and Google set the rules on their respective app-store platforms. If a platform does not open itself up, the processor is just a dumb pipe [to funnel transactions],” says Aaron McPherson, principal, AFM Consulting Partners. “Apple and Google won’t let processors cut deals [directly with app developers selling on their app stores] and banks and merchants would like to see to see this monopoly busted.”

McPherson argues that if processors and financial institutions work to change the app store model, they will lay the groundwork for doing much more business in the metaverse.

“There is an opportunity for processors to forge deals directly with developers to process transactions, as opposed to the platform, even though there are some developers that won’t care about what they are charged by the platform,” says McPherson. “If processors can break open the app market, it will be worth it, because that work can be applied to the metaverse.”

A Closed-Loop System

Another way metaverse platforms can control the movement of money is by making transactions directly between a user’s and a merchant’s digital wallet. In this scenario, the money bypasses traditional processing channels and goes nowhere near the banking system, points out David Birch, a United Kingdom-based author, advisor, and commentator on digital financial services.

“Metaverse payments don’t need the same infrastructure as payments in the physical world because users have the credentials to identify themselves, which helps prevent fraud,” Birch says. “The question for the processors is, what will they do if money in the metaverse moves directly between wallets?”

The answer to that question so far is unclear. Many payments providers, fintechs, and processors have penned articles and blogs, or given interviews, about the potential opportunities in the metaverse. But several of those companies contacted for this story declined comment, arguing the metaverse is still too new to discuss it in anything other than extremely broad terms.

One factor slowing progress for many processors is the lack of interoperability between the various platforms. As a result, a user’s digital assets and avatar cannot cross freely from one virtual community to another.

That makes any metaverse platform a closed-loop system. In a closed loop system, payments and merchant and customer relationships are typically controlled by the platform provider, according to payment experts.

A ‘Chaotic’ World

Despite the potential competition from proprietary currencies in the metaverse and the many unknowns regarding how commerce will develop, several financial technology providers remain optimistic about the opportunities the metaverse offers.

“Payment processors can facilitate the growth of commerce in the metaverse by enabling transactions with digital assets, promoting connected payment experiences, and ensuring secure transactions,” says Fiserv’s Raghavan. “With that said, the issues we face in the real world will continue to exist in virtual worlds. There will always be a need for an operating system that offers a credible, efficient, controlled, and secure means of conducting commerce.”

Despite their general optimism, payments experts agree that commerce in the metaverse is still in the early stages and has a long way to go before payments are as seamless as in the physical world.

“Think of the Palm Pilot, Blackberry, and iPhone evolution,” says Mike Storiale, vice president for innovation development at Synchrony Financial Services. “Palm Pilot users never thought they would want or need a device like the Blackberry, and Blackberry users thought the same about the iPhone initially. The metaverse is chaotic now, but that’s not a bad thing as companies are exploring what they can do in it now, as well as big ideas for down the road.”

For the payments-technology providers that are among the early adopters, arguably one of the best strategies they can follow is to test products and services early, then evaluate the results ahead of potential competitors to determine if there is strong enough business case to proceed. Notes McPherson: “Now is the time to define goals in the metaverse and test to see whether the metaverse is ready for prime time or not.”