Payment rails in the Metaverse: new opportunities for financial institutions

Developing payment railroads for the metaverse will be qualitatively different from the card payment and ACH transfer offerings that banks and payment startups developed to support ecommerce. Succeeding in this space requires a strong understanding of what makes metaverse transactions, security requirements, and compliance needs different from what already exists online and in the real world.

Any discussion of payments within the metaverse—the 3D virtual environments where people are already connecting for immersive gaming, shopping, and entertainment experiences—starts with the blockchain, the foundation of value storage and transfer in the metaverse. While the idea of a blockchain for secure database and ledger entries first emerged in the early 1990s, it was the launch of Bitcoin cryptocurrency in 2009 with a public blockchain ledger that moved this technology into the spotlight. One of the primary early uses for blockchain bitcoin transactions was international value transfers, because blockchain transactions had very low fees compared to traditional wire transfers. That comparatively low cost and security made the blockchain a driver of innovation in the metaverse payment space.

Today, we see cryptocurrency wallet payments as the primary method for metaverse transactions. Users can buy virtual goods, experiences, even virtual land and other property. In general, these blockchain payments are for small amounts of bitcoin. But making them is a high-friction process, compared to one-click e-commerce and tap-to-pay point of sale transactions. To make a payment in the metaverse, the user must first set up a crypto wallet, buy cryptocurrency and place it in the wallet, and then link the wallet to the metaverse entity where they want to transact. Because different entities use a variety of payment providers and accept a range of cryptocurrencies, the user may need to repeat this process whenever they visit a new metaverse space.

For one transaction in one environment, such as purchasing an NFT, this is a hassle. For multiple transactions across different spaces in the metaverse, it becomes a user experience problem and an obstacle to growth. Financial institutions can develop new payment methods for the metaverse, such as consumer-focused wallets similar to those used for e-commerce, but with blockchain security and payment options that include cryptocurrency as well as other forms of payment. This approach would make consumer transactions as well as peer-to-peer payments easier, while maintaining the security and lower transaction costs that drove blockchain’s initial popularity for bitcoin transactions.

Beyond the opportunity to support new payment methods, the metaverse offers banks the prospect of supporting new transaction types. That’s possible because the metaverse expands the way value is created and allows even small-scale creators to benefit from their work. For example, the average person who shares content on social media doesn’t derive monetary value from their posts, but the platform does. In the metaverse, with blockchain transactions, the average creator can earn value for themselves through microtransactions.

Even users who don’t create content can earn value through actions they take within the metaverse. For example, users who attend a class in the metaverse, watch an ad, take a poll, attend a concert, or engage in a similar way can earn tokens from their school, favorite brands and entertainers, and advertisers. Users can accumulate these tokens to trade, cash in, or sell. This is a new business model that requires new ways to manage payments, and financial institutions are in the best position to develop these new methods because of their experience.

Banks are also ideally positioned to be the gateway between real-world payments and metaverse transactions. One obvious use case is converting cryptocurrency to dollars, euros, or another fiat currency so customers can spend the value they earn in the metaverse online or in physical stores. Another use case is helping customers acquire and manage “digital twin” products. For example, if a customer buys a coat in an online store, they might receive the item to wear and a token for virtual duplicate for their avatar in the metaverse. Banks are in the best position to verify these virtual purchases and ensure that customers can securely store and use their virtual goods.

As in the physical and online spaces, the biggest challenge for banks that want to build payment railways in the metaverse is regulatory compliance, due to the complexity of the environment and the cost. Spending on compliance has been rising for the past several years, and the ongoing transformation to AI-powered RegTech is driving changes in how banks spend their compliance budgets. Banks that seek to support payments in the metaverse must build solutions that meet the same compliance standards as the real world for security and transparency. In addition, they need to adapt those compliance standards to new use cases that only exist in the metaverse. The clearest path forward is to work directly with regulators when developing metaverse payment structures and value-transfer protocols.

Another major metaverse challenge for banks is the need to adapt transfer management processes to suit new transaction and currency types. Many back-office processes related to transfer management can be automated because the blockchain makes it comparatively easy to do so. For example, banks can program smart contracts to automatically execute blockchain transactions when specific conditions are met, to securely accelerate value transfers while meeting regulatory requirements. A series of smart contracts can automate workflows along the blockchain.

The banks we see innovating in the metaverse payment rails space are primarily focusing for now on corporate services, such as clearing and settlement of cryptocurrency transactions. However, as mentioned above, there is a wide range of potential use cases for services relating to individuals’ engagements with brands and businesses in the metaverse.

As with any new technology or service offering, it’s wise to start with a simple use case that’s relatively easy to build, test, implement, and learn from before pursuing more complicated use cases. For example, a bank might start by building a gateway between the metaverse and the physical world to convert customers’ cryptocurrency holdings into fiat currency to deposit in their bank accounts. This kind of use case builds on banks’ existing expertise and can appeal to early adopters who want an easier crypto conversion experience.

Any metaverse payment service will require the selection of the appropriate blockchain and the creation of a new technology layer based on the chosen blockchain’s open-source protocol. For these steps, banks need to select partners who can provide expertise and resources to save time and avoid security and compliance missteps along the way. Once the initial use case is up and running, good blockchain partners can provide guidance on enhancing and optimizing the initial use case, as well as identifying the next best use case to implement.

Starting small, building on areas of expertise, working with the right partners, and engaging early metaverse and crypto adopters can help banks lay the groundwork for new payment services that capitalize on the opportunities waiting in the metaverse.