What Is This Metaverse Thing Anyways? And What Does It Mean for Banks?

Are you familiar with “Ready Player One?” In Ernest Cline’s 2011 best-seller, a global dystopia has set in. But humanity has a sanctuary – the Oasis, a virtual world that the novel’s protagonists access by means of virtual reality headsets and haptic feedback suits. People spend the majority of their time there. They work, go to school, meet friends, or play games.

The book was so successful that it was even made into a film by Steven Spielberg in 2018. Cline’s notion of a virtual parallel world seems to have struck a chord. Or did he just see the writing on the wall?

In our non-fictional world, this virtual world isn’t the Oasis, but the metaverse. You may be somewhat familiar with the term. After all, the American tech giant Facebook changed its name in October 2021. The company is now called Meta – and aims to build something like an Oasis. To achieve this, the company is creating 10,000 jobs in Europe alone within the next five years and investing billions of US dollars into research and development.

But Facebook, or Meta, isn’t the only player involved in creating a new virtual world. With Vortex, Microsoft is working toward its own metaverse, while Fortnite studio Epic Games recently announced its intent to create a metaverse, and in decentralized crypto games such as Sandbox or Decentraland virtual properties have already been sold for vast sums of money. Furthermore, other large tech companies as well as start-ups and smaller studios are arriving on scene, wanting to either create their own metaverse, or work on the underlying technology.

But let’s go back to the beginning: What is a metaverse anyway? There is no generally accepted definition of the term yet. The original idea for it also stems from a science fiction novel. The term “Metaverse” was coined by Neal Stephenson in his 1992 novel “Snow Crash”. In his novel, too, alongside the real world there’s an ultra-realistic online world, the Metaverse.

And how does one envision the metaverse in the real world? Well, pretty much as it is in the novels. In simple terms, a metaverse is a walkable internet that can be entered using an avatar. Meta CEO Mark Zuckerberg describes it as an “embodied internet.” Users don’t view the internet as something only depicted on a screen, but find themselves within it – like in a video game. The metaverse is thereby not just a single world, but rather multiple different worlds that all exist in parallel and in real time. And thanks to virtual or augmented reality, these worlds are expected to be so realistic at some point that they’re hardly distinguishable from reality. In a video that Meta released with the name change, Zuckerberg stated that “We’ll be able to feel present – like we’re right there with people no matter how far apart we actually are.”

Metaverse is the concept of the hour. But anyone who wants to find out more about this can hardly avoid another hype term: NFTs. In short: NFTs represent certificates of authenticity for digital assets (you can find a fuller explanation here). Just as people own real things in the real world, people can own virtual things in the virtual world. This is where NFTs come into play.

If you filter for “virtual worlds” on the largest NFT platform, Opensea, i.e., if you search for all NFTs that represent objects in a virtual world, the platform lists a volume of more than a billion such items. The latest trend: People are buying virtual real estate – and paying a lot of money for it. In December, for example, someone proudly paid 450,000 US dollars to be rapper Snoop Dogg’s neighbor in the Sandbox metaverse. Also, famous fashion brands such as Balenciaga, Gucci, H&M, Nike, and recently Adidas are making their initial venture into the metaverse and trying – mostly through NFTs – to build a new and profitable digital pillar.

And the banks? They’re also gradually moving in that direction. Last fall, a couple of South Korean banks did some pioneering work. The Shinhan Bank in Seoul, for example, is working on its own metaverse platform. And the KB Kookmin Bank, the largest bank in South Korea, set up a virtual branch in which clients could access financial services via avatars.

In February, the US big bank J.P. Morgan got involved as well. J.P. Morgan bought a piece of land in the Decentraland 3D world, and opened the Onyx lounge, in which they plan to support clients by providing them advice in the virtual world as well. According to their most recent published report, “Opportunities in the Metaverse”, the big bank even projects that every sector will be involved in the metaverse in one form or another in coming years. The opportunities, according to J.P. Morgan, are massive. They estimate that total revenues within the metaverse could grow to more than a trillion US dollars annually.

Should J.P. Morgan turn out to be right in its forecasts, banks would do well to get involved in the metaverse now. Digital branches open up a new client interface for banks. But that’s just one of many possibilities that would result from the metaverse’s progression. When more and more brands offer their products in digital form, more and more transactions result. Somebody has to orchestrate these payments.

Moreover, digital real estate is booming these days. If this trend continues, the demand for mortgages and loans will continue to grow. In other words, for people to be able to finance virtual objects in the virtual world, they need someone who will lend them the money to do so. Currently, some 54 billion US dollars is spent annually on virtual goods. And that’s despite the fact that the metaverse is still in its infancy.  

If the metaverse becomes a full-fledged reality – and there are good reasons to believe it will – a large portion of the net product will be moved to the virtual world. Traditional players would do well to remain attentive so as to not miss the boat on the metaverse.

Whether the metaverse will arrive, when it will arrive, and what it will look like is anybody’s guess. There are indeed some reasons to think it may never come to fruition – for instance the extremely expensive infrastructure, problems with sustainability and regulatory uncertainties. But there are also many things in its favor such as Meta, and the many other companies sinking a lot of money into the technology. There’s the mass of talented professionals streaming into Silicon Valley companies working on the metaverse. And the fact that the timing’s right. Virtual and augmented reality are no longer novelties. The COVID-19 pandemic fueled the need for virtual proximity despite physical separation. And the NFT and crypto boom of the last year shows that the world is ready for blockchain technology. Ultimately, it’s the same as with any trend – one shouldn’t overestimate things in the short term, nor should one underestimate them over the long term.