What will the metaverse mean for digital commerce?

Following the 28 October 2021 announcement by Mark Zuckerberg that Facebook will be renamed ‘Meta’, the term ‘metaverse’ has truly come out from the back room, where the gamer is consumed by games such as Roblox or Fortnite, into everyone’s consciousness. The metaverse is expected to be the next big thing on the internet, an intersection of the physical and digital worlds, where augmented reality and virtual reality enable people to develop and live in new worlds or environments. Roblox or Fortnite are two examples that give us a peek into what the metaverse could look like. In the near future, it will be a fully immersive experience for users to express themselves, connect, interact, and conduct commerce. The metaverse is not a new concept as it has been around for almost two decades. Neal Stephenson, the American science fiction author, has been credited with coining the term ‘metaverse’ in his 1992 novel Snow Crash.

Conducting commerce in the metaverse has raised an important question at Edgar, Dunn & Company – could the metaverse be the place where an entirely new set of payment methods and payment rails might be built from scratch? Is there a better set of payment rails that are designed for the metaverse rather than using a set of payment rails that we have in the real world? Another essential question that we want to explore in this article is what will retailers and banks need to do to remain relevant in the metaverse?

In the ‘real-world’, other than physical cash (i.e., metal coins and paper banknotes) we have only had two payment rails that have dominated the 70+ year history of electronic payments. These are ACH (Automated Clearing House) and payment cards. The most common of these payment rails is ACH (Automated Clearing House), account to account transfers or simply bank to bank transfers. A few examples of ACH solutions include the Fedwire in the US, Faster Payments in the UK, NETF (National Electronic Funds Transfer) in India or the hundreds of national real-time gross settlement (RTGS) systems that operate around the world for bank-to-bank payments. In the US, they are commonly referred to as wire transfers.

The second payment rail is card systems that operate internationally, such as Visa, Mastercard, Discover, Diners Club, JCB and American Express. There are also card payment rails that operate on a domestic basis, such as Cartes Bancaires, which is the local card payment rail and the most widely used card payment scheme in France. There is Bancontact in Belgium, Dankort in Denmark, Troy in Turkey, RuPay in India, Interac in Canada, Mir in Russia and this list is long and continues to grow. It is debatable whether UnionPay is a Chinese payment card or an international card scheme. That is a debate for another time.

What will be the preferred currency in the metaverse?

Currencies developed in the virtual world have similarities to the real world. Each currency has developed independently; as we have seen with the US Dollar, it was independent of the Great British Pound. Consumers, businesses, and banks exchange these to be able to transact in the US or the UK. In the virtual world, Fortnite uses V-Bucks, Roblox uses Robux, Call of Duty has COD Points, and Minecraft uses Minecoins. My teenage daughter regularly has Robux on her Christmas and Birthday wish lists. The current exchange rate is around 2,400 Robux for about $30. For 40 Robux, you can upgrade your virtual vehicle in Brookhaven, a role-playing game within Roblox.

Back in the real world, there has been a plethora of alternative payment methods that we have seen significant growth. These include e-wallets and mobile wallets, such as PayPal, Venmo, Paysafecard, Swish, iDeal, BNPL, Vipps, WeChat, AliPay, ApplePay, etc GooglePay, Doku Wallet, GCash, GoPay, Mada, Fawry and so on. These are not different payment rails; they just ride the two established rails – ACH or card. Just for completeness, we also have mobile money, such as m-Pesa in Kenya. Mobile money is a payment instrument offered by mobile network operators, such as MTN, Equitel, Airtel, Tigo Cash, Orange, and MobiCash. These could be seen as a third payment rail, but they are commonly closed networks and rely on the ACH or card rails to allow funds to be deposited into the network or withdrawn. These real-world alternative payment methods are not valid currencies in the metaverse.

In the metaverse, how will you pay for your virtual stuff?

It seems that the metaverse would be begging for a new currency that is designed for the new world and not one that came from the old world. Blockchain technologies, cryptocurrencies, and non-fungible tokens (NFTs) have been poised to be the recognised foundation for all commerce in the metaverse. Grayscale, the Bitcoin Trust, recently suggested that the metaverse has the potential to become a $1 trillion annual revenue opportunity for new virtual worlds. The Greyscale report, published in November 2021, refers to Decentraland which is a 3D virtual reality world powered by the Ethereum blockchain. It opened to the public in February 2020 and allows users to create virtual buildings including homes and theme parks. Another example, Enjin Coin (ENJ), also an Ethereum based token, aims to make it easy for users, businesses, and brands to use non-fungible tokens (NFTs). Enjin Coin is used to directly back the value of NFTs minted within the Enjin ecosystem. This would be a good fit for the metaverse and leverage the proven Ethereum token. Enjin is a Singapore-based blockchain platform dedicated to serving as the infrastructure for the decentralized gaming boom. Originally created in 2009, Enjin is now one of the largest gaming community platforms in the world, claiming to have around 20 million registered gamers. Bloktopia, Decentraland, The Sandbox, Highstreet, MetaHero are some of the biggest gaming platforms in the metaverse. All of these platforms use blockchain technologies to facilitate commerce. Ethereum and NFT have a tight linkage and are also likely to be an integral part of digital commerce in the metaverse.

Whether through government-backed Central Bank Digital Currencies (CBDCs) or other cryptocurrencies, it is expected that the future of money in the metaverse will be based on a new digital currency. New business models for the metaverse economy provide an opportunity for financial institutions to find new opportunities with a digital currency. We have already seen NFTs gaining publicity in the real world, and they are to be expected to be a considerable presence in the metaverse. As NFTs are a type of blockchain-based tokens that are not interchangeable with one another, they will be an ideal currency for the virtual economy in the metaverse. They can represent pretty much anything, such as digital files, such as art, audio, videos, items in video games, and other forms of creative content media. Could the banks play a role in processing NFTs and acting as the trusted third party? This remains to be seen, and the revenue model for the bank has been elusive so far. This stuff is pioneering. Defining the metaverse economy and how it works seems to be each to their own. It is currently undefined and fragmented across the different platforms. There is some virtual land grabbing, and this will probably be followed by the regulators wishing to protect consumers and businesses who could be open to some pioneering virtual reality scams or some old-fashioned money laundering.

Will there be a metaverse bank?

Will there be banks and payment networks such as Mastercard, Visa and American Express, and will they be accepted in the metaverse? Will there be an issuing bank that has the relationship with the consumer (i.e., the cardholder) and a merchant acquiring bank that has the relationship with the retailer? Probably not. Let us be real for a moment. No one would want to duplicate an antiquated payment solution for the metaverse. It just about works in the real world. There are too many unhappy outcomes – such as chargebacks, fraud, returns and refunds, delayed clearing and settlement and inconsistent reconciliation. Any god-like creator of the metaverse would not want to replicate these unhappy experiences.

Will we see Wells Fargo, HSBC, Citi and Bank of America establish their distinct banking brands in the metaverse? The short answer is yes – they all have. To what mean? It is all about positioning their brands in the new virtual world. More recently, three Korean banks KEB Hana Bank, Woori Bank and KB Kookmin Bank have launched bank branches in a metaverse. KB Kookmin Bank allows its customers to move around their virtual financial town that has a virtual branch. This sounds fun but is it serious and is it secure? Can it be trusted? Should the metaverse mimic the real world with old-world payment methods? On the other hand, blockchain technology has already proven to have security and trust inherent in its design, it is more than able to support peer to peer payments (P2P) and be scalable to support both B2C and B2B payments. As blockchain technology enables instant confirmation of payment and information exchange near real-time, there are no disputes or reconciliation issues. The buyer and the seller are transacting in a transparent standardised environment of trust. Blockchain technology has given rise to a new platform for business relationships that encompasses ease of use, low cost, and high security. It is designed for a new world. It will also contribute to a considerable simplification and acceleration of the economy in the metaverse. Something that old-world payments are unlikely to achieve in the metaverse.

In the pre-Meta days, the Facebook plan was to build a global financial system that everyone could use. It was called ‘Libra’ the cryptocurrency from Facebook, and it did not go as planned. Within a few weeks, when Libra was launched in May 2019, there was a considerable regulatory backlash. As a result, nearly a year after Libra 1.0 was announced, Libra 2.0 was announced, a new scaled-down platform and made regulator-friendly. Could Libra 2.0 be ready for the metaverse? Or does this need to be further enhanced to Libra 3.0? The answer is unclear, and Zuckerberg has shared no evidence whether Libra is part of the metaverse or not. When you investigate the new holding company, with its blue infinity symbol as a logo, Meta, will encompass Facebook, its largest subsidiary, as well as the apps Instagram and WhatsApp and the virtual reality brand Oculus. There is no mention of Libra.

Meanwhile, Facebook rolled out in 2020 two of its metaverse projects in beta – Horizon Worlds, which allows users to invite friends over into their digital world, and Horizon Workrooms, which does the same in professional settings. Zuckerberg also said Facebook plans to further explore NFTs and crypto to help facilitate media content that can be represented digitally and is working on new gaming applications. This is only a clue as to what Meta’s metaverse is likely to use as its preferred payment method.

What can you buy in the metaverse?

Meta’s Oculus, the preferred VR headset for the Horizon Worlds and Horizon Workrooms, users can load their meta-account with American Express, Mastercard, Visa and PayPal. This follows a pattern of loading and exchanging value from one system to another. Moreover, what about shopping in the metaverse? When Mark Zuckerberg released his video announcing the rebranding his avatar, he went through a wardrobe of fashion possibilities. It seems that the fashion industry is equally obsessed with the metaverse. Big fashion brands are already making millions of dollars selling clothing and accessories that exist only in the metaverse. In the future, if your work and play take place in the metaverse, you will want to have some clothes! Just like the real world, you will not be popping out to your local shops naked.

Most of the fashion industry’s investments in the metaverse have been through video game skins, which make up an estimated $40 billion a year market. Skins represent a relatively low-cost way to engage the fashion-savvy gaming community. Balenciaga, a luxury fashion house founded way before the internet in 1919 by the Spanish designer Cristóbal Balenciaga, has partnered with Fortnite and worked with Fortnite’s parent company Epic Games to create a video game for its Fall 2021 fashion show. Other brands are now announcing similar collaborations. For example, the British designer Stefan Cooke announced his designs would be a part of The Sims. Burberry and Louis Vuitton are minting NFTs to be metaverse-ready.

Adidas, Nike and H&M are also turning their attention to claim their presence in the metaverse. Adidas Originals, the fashion and lifestyle subdivision of the German sportswear giant, is launching an NFT collection of both physical and digital products. Adidas also purchased 144 parcels of virtual land in The Sandbox, a game for mobile phones and Microsoft Windows, to which it will add content. Gucci’s Roblox bags, now famously, were resold for more than their real-world physical bags. Burberry’s NFT characters for Blankos Block Party have been sold eight times their original value. The metaverse represents an attractive space for future growth for fashion brands, with metaverse gaming and NFTs forecast to constitute 10% of the luxury goods market by 2030 – a €50 billion revenue opportunity, according to Morgan Stanley. Again, this is virtual land grabbing.

What is the future of digital commerce in the metaverse?

Digital-only products, such as fashion skins, NFTs, music, games, will be sold in the metaverse. Equally, there will be events, such as music gigs and business conferences, that will be held in the metaverse. All these will need to be sold and purchased in the metaverse and blockchain technologies will be the preferred payment method. Defining the metaverse economy will be pioneering, revolutionary and unlikely to be based on the old world or real-world payment ecosystems. As to who will be the retailers and what will be the products and services sold in the metaverse is currently uncharted waters. For the retailers and the brands, the metaverse will be all about positioning their brands by grabbing as much virtual land or real estate as possible. Edgar, Dunn & Company will keep a watchful eye on how commerce and payments intend to be interoperable and be trusted by consumers and businesses as we witness the metaverse unfold over the next few years.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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