With digital commerce showing huge potential, it’s time for payments players to take this virtual world seriously.
Virtual reality (VR), augmented reality (AR), non-fungible tokens (NFTs), extended reality, mixed reality, Web 3.0, blockchain—all of these concepts have been lumped together into the term “metaverse.” And a lot of other terms have been tossed into this same word salad. They’re all attempting to define one thing: the next generation of online interactivity.
But it is difficult to envision a future-state technology if the terminology doesn’t help to clarify things. Let’s start with a basic definition of the metaverse from Louis Rosenburg, chief executive of Unanimous AI:
“A metaverse is a persistent and immersive simulated world that is experienced in the first person by large groups of simultaneous users who share a strong sense of mutual presence. It can be fully virtual (i.e., a virtual metaverse), or it can exist as layers of virtual content overlaid on the real world (i.e., an augmented metaverse).”
The key term here is “simulated world.” In its purest form, the experience of the metaverse is completely immersive, requiring a dedicated headset and controllers to place the individual fully into a virtual world that’s independent of the physical space. If you have not had the opportunity to experience a VR headset, it’s worth trying if for no other reason than to understand the sense of immersion and departure from the physical world that it creates.
The experience can be incredibly intense and disorienting for many people, and for some it can induce motion sickness. On the less intense end of the spectrum, AR overlays digital imagery and messaging onto the physical world via AR eyewear, heads-up displays in vehicles, or displays on smart phones or traditional laptops.
The primary point of entry into the metaverse to date has been through online gaming. Multiplayer games have been around for several years. Players work together or against each other, communicate in real time, and coordinate their character’s actions with others.
With technology available to allow an immersive experience, it’s a small step from playing Call of Duty on an Xbox to playing the same game on a VR headset. And, it’s a much more interesting and entertaining environment.
But once an individual is in an immersive environment with the ability to move around and communicate with others in the space, it’s an equally small step to move from combat to community.
Led by Meta (formerly Facebook Inc.), organizations are creating entire worlds for people to visit and interact with others, attend virtual events like concerts and lectures, and create communities of interest. This aspect of the metaverse is a logical extension of online chat, and chat rooms themselves were the precursors to these immersive communities found in the metaverse.
The current VR experience works well for gaming, but communities are much more complex. Since individuals need to be able to move around and take independent action, developers have to allow for a lot more activity than is typical in a gaming environment.
A persona that represents an individual in the metaverse is called an “avatar.” At the current state of the art, they are fairly simple and, in terms of technology, primitive. But the technology is improving quickly as more companies and more capital pour into this activity.
Still, with all the buzz about the VR space, it is important to remember that it is still very early days for the technology. In 2021, only about 18% of the U.S. population had experienced VR at least once, and there were about 28 million VR headset users, or about 8% of the total population. Usage is growing quickly, but it’s still a fairly low figure. AR is used regularly by about 83 million people in the U.S.
Growth will continue at a rapid pace, but there are a few issues that need to be addressed before the metaverse comes anywhere close to current online alternatives. These include:
- Technology – Managing thousands, or ultimately millions, of individual avatars and rendering an engaging and entertaining space is complex. The industry is still scaling up to support user demands for graphic intensity.
- User interface – A VR headset delivers an incredible experience, but with the most popular device, Meta’s Meta Quest 2, priced at $399, it’s not likely to achieve critical mass with respect to adoption any time soon. Other devices like AR glasses are starting to show up, but it will be several years before the majority of consumers will have access to a dedicated metaverse interface.
- Interoperability – Just as closed-loop “walled gardens” like CompuServe and AOL started the movement to online communities and commerce, there are many different metaverses that can be accessed online, including Meta’s Horizon Worlds, Decentraland, The Sandbox, and the KEYS Metaverse, but they are all standalone. At this point, an individual’s avatar is restricted to a single metaverse, and there are no channels for individuals to easily travel between the different spaces without separate log-ins. As with the Internet, where the interoperability of the worldwide Web drove adoption, the separate spaces in the metaverse need to be connected before criticality can be achieved.
These issues are being addressed. But until there is a fully interoperable “universe” of metaverses that can be accessed by lower-cost devices, the space will grow quickly, but far from exponentially.
Commerce = Payments
The appeal of an immersive experience is driving retailers and other businesses into the space. Adidas, Burberry, Gucci, Tommy Hilfiger, Nike, Samsung, and Louis Vuitton all have stores in the metaverse. In financial services, several organizations, including HSBC and J.P. Morgan, have set up shop in the space.
An immersive digital experience is an interesting opportunity for retailers to offer their customers unique shopping experiences that are far richer than browsing for goods online. The metaverse is also creating opportunities for merchants to sell digital goods and services that are only viable in the space. Several boutique firms customize avatars. Others offer unique attire for avatars.
With commerce comes payments, and the major players are moving in. Visa and Mastercard are actively engaged in developing capabilities for a metaverse presence, and the commerce platform Shopify is going to support e-commerce for its merchants in the metaverse. Meta is creating its own digital wallet called Meta Pay. There are also a number of cryptocurrency wallets available to use for purchases in the metaverse.
Initially, the payment experience appears to be a simple extension of e-commerce with card-on-file (or the cryptocurrency equivalent) and digital wallets being the primary payment tools for consumers. But as was the case with the explosion of e-commerce when the Web achieved criticality, new methods of payment and value transfer can be expected in the metaverse, such as new forms of peer-to-peer payments and digital gift cards.
Beyond traditional payments, many current participants in the space are cryptocurrency users and investors. The metaverse Decentraland, for example, requires users to have a cryptocurrency wallet linked to their account to enable payments. This focus on cryptocurrency limits the potential for growth in this metaverse since many, if not most, future users do not use cryptocurrency and won’t change their purchase behavior to participate in a new space.
E-commerce took off when companies like PayPal provided consumers
with a way to use their existing payment credentials to make online purchases, and the metaverse will likely be no different.
Cryptocurrency is also, for now, mostly free of the regulatory constraints of traditional payments, and consumers could be confused if they think that the rules
that apply to paying by credit or debit card also apply to a cryptocurrency purchase.
With all new commerce environments, new opportunities for fraud and theft inevitably follow. Will “avatar identity theft” create new opportunities for fraudsters to abscond with a user’s virtual wallet? Will the purchase of digital goods create new opportunities to rip off digital merchants? It is likely that the new space will create a new set of fraud and theft scenarios for financial institutions, regulators, and enforcement organizations.
Billions are being invested in making the metaverse a vibrant and important component of the digital economy. Ultimately, the VR equivalent of a Web browser will emerge to enable an open, interoperable metaverse ecosystem.
Commerce is already happening in the metaverse, and it will continue to expand and morph as the space evolves. There will be opportunities to create new form factors, processes, and offerings to simplify value transfer.
It may not yet be time for many financial-services companies to move aggressively to participate, but at the very least, every organization should be spending time and resources to learn about the metaverse.
The metaverse is indeed “a thing,” and it’s a thing that will create a lot of value for companies that understand the space, and consumer behavior within the space, as the metaverse grows toward critical mass.