Financial services in the metaverse: opportunities and paths forward — part 1

This third piece in our series on the metaverse, focuses on the human experience, technologies and value exchange as starting points for financial services firms.

In brief

• As the metaverse connects the digital and physical worlds, financial institutions have an opportunity to shape digital ownership and new economies.
• Younger generations may demand metaverse experiences just like they demanded better digital, omnichannel experiences decades ago.
• With decentralized infrastructure, digital identity and digital asset ownership, the metaverse will allow users to conduct commerce with real ownership.

The metaverse has captured the attention, if not the imagination, of artists, technology titans and C-suite executives around the globe. Marketers envision a new platform for brands to connect with consumers, and knowledge workers hope for something more immersive, compelling and productive than yet another video call. Financial services executives see both a shift in the rails of commerce and a new platform to connect with new and existing customers.

Yet skepticism and hesitance persist. Is the metaverse just an experience layer for the internet? Do I have to buy expensive and clunky goggles? Is it all a scam to get people to buy crypto and non-fungible tokens (NFTs)? What is the relative risk of diving in vs. waiting for clarity?

We believe the metaverse is the way humans will experience the internet of the future. It’s the connection between 3D digital and physical worlds through technologies such as virtual reality, augmented reality and extended reality. Combined with a decentralized internet infrastructure (i.e., Web3) that democratizes content development, ownership and monetization of digital assets, the metaverse can empower individuals to create, share and exchange value beyond just interacting in a virtual environment. While Web3 and the metaverse are not dependent, they are interdependent in how they will enhance users’ ability to interact with each other and content in the next-generation internet.

There won’t be a single metaverse; there will be metaverses, or even more likely, a variety of metaverse experiences. And, ultimately, Web3-powered metaverse experiences will create user-driven economies and digital ownership over identity, content and assets with limited intermediaries. This will unlock business opportunities for creators as well as financial institutions and the clients they advise.

Framing the opportunity

The term metaverse often feels nebulous and expansive. Just like the internet was referred to as the “information superhighway” or the “cyberspace” in the past, metaverse’s meaning will continue to evolve and morph as technology advances and evermore sophisticated use cases that bring both immersive experiences and a decentralized internet seep into the mainstream. In our third in a series of points of view on the metaverse, we fill in gaps in how companies must evaluate their participation. A pragmatic framework is required to put a perimeter around thinking through opportunities and offering a starting point to develop a strategy. Aligned heavily to use cases, the EY view assesses opportunities across the following categories:

In addition, tax, legal and regulatory issues must be considered relative to the development of a metaverse strategy. In this paper, we focus on the human experience, technologies and value exchange as starting points for financial services firms.

The future of the human experience

While the metaverse is primarily navigated today in two-dimensional experiences, augmented reality, virtual reality and extended reality stand poised to make us feel truly present “on” the internet as opposed to “connecting” to it. In fact, it’s the immersive experience layer that may be the firm anchor to connect the metaverse to our lives.

Today we look down. We look down at our devices to consume information, often isolating ourselves from the people sitting right next to us. The metaverse experience is one in which we will look around, not down, and perhaps even feel our virtual surroundings through haptic devices. We’ll engage with others in their avatar form in a more emotive version of the internet. While there are those who portend doom of a world where virtual reality goggles are just another way to tune out the real world, augmented and extended reality promise the best of both worlds: a way to interact with the virtual, while maintaining a connection to the physical. While most of us would rather be in person at a conference or business meeting, if given only the choice between another video call or an immersive experience, the latter offers a new and compelling way to collaborate and socialize.

Financial services firms may dismiss the metaverse at their own risk, believing that their customers are not there yet. This might be true for their current customers, but what about their future customers, future employees and future leaders? There’s likely a generational aspect to the metaverse, and its adoption will be somewhat dependent on how this experience matures and unfolds, both through the quality of the virtual experience and the evolution of use cases for the metaverse. But illustrated by the time and money spent today in immersive games, which could be viewed as training wheels for the metaverse, younger generations may demand metaverse experiences from their future employers and service providers just like they demanded better digital, omnichannel experiences decades ago.

In a recent EY study, it was estimated that 2.9b people in 2021 played a video game — nearly one out of every three people on the planet. It was further projected that by 2025, the gaming industry is expected to generate nearly $211b in revenue. While gaming is not the same as the metaverse, it can be considered a proxy. The immersive and engaging world of gaming provides users with a real sense of presence and interaction with other humans online and is anchored in experiences that offer goals and immediate feedback to keep users engaged.

Web3 technology plays a role here. Digital assets facilitated by blockchain technology create opportunities for a new form of wealth creation and asset ownership. This creates an additional generational aspect of metaverse adoption, since some of the most popular gaming platforms also support in-game economies where users purchase digital assets. In the metaverse, there is the opportunity for this to extend beyond skins or weapons used to win a multiplayer game. Virtual land, access to experiences like concerts, digital goods to enhance our metaverse experience such as branded avatar clothing, and platform-specific crypto currencies all represent real value to users and introduce the opportunity for payments, collateralization and custody over digital assets.

For the metaverse to see widespread adoption, it requires more than just an inviting virtual environment. Content is consumed differently in the metaverse, demanding approaches more compelling than a standard slide presentation or animation. Perhaps our avatars will carry with them a library of digital content that can be shared on demand with other participants, exchanged between wallets or shared in real time in virtual displays. Accessibility must be considered for individuals with hearing, visual or dexterity impairments. Consumer behavior and social interaction must also be considered, so the experience is a safe place to socialize and conduct commerce.

Critical to making these experiences compelling is the continuing maturation of the underlying technologies. In addition to advancements in goggles and wearable devices, including haptics, which may eventually help immerse one’s entire physical body in an experience, infrastructure, such as central processing units (CPUs), and network bandwidth must continue to progress. The metaverse can’t be a place where we experience latency in viewing beautifully rendered vistas or have an audio experience that reminds us of conference calls from 15 years ago. A combination of bandwidth, edge computing, efficient and realistic 3D rendering, spatial audio, and a compelling activity must combine to capture and keep users’ attention.

From an adoption perspective, giving people a reason to engage is critical to success: a gathering of friends, a game or a business meeting in a virtual collaborative space. If the experience doesn’t add value in and of itself or elevate beyond a non-metaverse version of that experience, then elaborate development projects will sit idle as nothing more than exercises in 3D design. For those building the metaverse, the challenge is to create rich, immersive experiences and provide a compelling reason to come to the metaverse. Given the proliferation of smart devices and lower-than-ever barriers of entry in a global service economy, the war for attention in the digital world has only just begun, and metaverse experiences, despite their 3D realistic nature, will compete for digital mindshare.

New forms of value exchange in the metaverse

The metaverse is far more than a place to hang out in a 3D version of internet surfing. This view fails to understand the impact that the combination of Web3 and metaverse will make on the value that can be created and exchanged in virtual environments.

The ability to tokenize assets or create derivative trading instruments using blockchain technology may unlock potentially new business models and create marketplaces for digital assets and client advisory services. Web3 unleashes value models in the creation, storage and exchange of digital assets, while the metaverse provides the canvas on which to paint this new digital economy. Anywhere there is commerce, there is the need for trusted intermediaries, even in a Web3 landscape bent on reducing the reliance on centralized platforms.

Today, global brands are already selling digital and real-world products in the metaverse, creating new revenue streams adjacent to and extending product lines. Whether you’d like your avatar dressed in the latest “metafashion” or like to shop in the metaverse for real-world goods, users today can express themselves and spend their dollars, and crypto, in the metaverse. Creators can monetize their own content and artistry, selling to their peers and enhancing the metaverse experience for others. This all requires payment infrastructures, including on- and off-ramps to fiat currency. Financial services firms have been de facto trusted sources for such services in the current real-world economy, and it would be expected that the metaverse provides new opportunities to extend these services.

Right now, tools like digital wallets to facilitate these transactions are not user friendly; not well integrated to traditional financial infrastructure; and serve in hybrid roles, including custody for both cryptocurrency and digital assets. The on- and off-ramps from crypto to fiat currency and back are complex, unfamiliar and inhibit adoption. These tools can benefit greatly from the decades of understanding financial institutions possess regarding how to make tools user friendly and remove friction from transactions.

Decentralized finance (DeFi) seeks to remake the financial system in more of a peer-to-peer model, removing friction in transactions and the need for a middleman. While not dependent, the metaverse and DeFi may evolve in a symbiotic way as metaverse environments encourage the development of communities, including commerce. Today, creators in metaverse spaces design and market digital goods for consumption in the virtual world. They conduct transactions peer-to-peer, on the blockchain, largely without traditional financial intermediaries. Financial services firms could meet metaverse dwellers where and how they want to transact, making the experience more user friendly, and safer, introducing technology and services to protect consumers.

Next-gen technologies

On one level, the metaverse can be viewed as a set of immersive technologies, such as 3D modeling, virtual reality, augmented reality and extended reality, that can make the digital world feel more real for humans or make real-world experiences feel more digitally connected. This can range from virtual worlds designed in sophisticated game engines, with which users can find themselves playing for days and hours, to development platforms purpose-built to design discreet metaverse experiences for business functions or social events. While devices such as goggles or headsets enhance these immersive experiences, three-dimensional virtual worlds can add to an experience even when viewed on two-dimensional flat screens.

This evolution to fully immersive virtual reality vs. lighter-touch augmented reality glasses, which place virtual objects in the context of the real world, and even two-dimensional interfaces for three-dimensional worlds, is still unfolding. But this view focused primarily on the user experience technology layer is just scratching the surface on what the metaverse can be. Combined with the decentralized infrastructure, digital identity and digital asset ownership achieved through blockchain technology, a Web3-empowered metaverse will be a place where users explore, create and conduct commerce with real ownership over content, assets and spaces.

Today in the metaverse, users own NFTs not only representing digital art but also penthouse apartments, ski chalets and yachts that exist in the virtual world, where they can invite friends and business colleagues to meet virtually. Technologies like smart contracts will embed programable functions into digital assets allowing ease of transfer, collateralization and empowering new financial services.

For companies looking to make investments in the metaverse, it’s critical to consider both the interoperability of these new technologies and their level of maturity. Identity, for example, enabled by digital wallets, may replace the ubiquitous logins we use today to traverse digital platforms. A digital wallet provides a way to validate one’s identity and a place to store digital assets. It also serves as a critical element of interoperability, allowing our identity and assets, via our avatar, to travel with us across metaverse platforms, much like a virtual world passport. Connected metaverses where users can move freely between experiences benefit from the network effect and increase the commercial opportunities available to participants.

The way forward

How to start in the metaverse is a daunting task, considering how hyped and conjoined many of the concepts have become. It first requires an assessment of where on the value chain a firm wishes to participate directly and where it should partner. Most importantly, it requires a definition of strategic goals and an objective look at a firm’s current capabilities and the development of an overarching roadmap for entry.

Identifying the technologies critical to success, tracking their maturity, and developing the partnerships necessary to execute an entrance into the metaverse is all part of building that roadmap. As technology matures and experiences evolve, firms must treat this roadmap as a living guide and constantly assess progress. The result should be a strategy aligned to best fit opportunities relative to current and needed skillsets.