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Payments Briefing: What do FIs need to know about payments in the metaverse?

  • This week, we look at how and why traditional FIs and fintechs should be thinking about payments in the metaverse.
  • We also discuss why card giants like Mastercard, Visa, and Amex are getting involved in sonic branding.

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Payments Briefing: What do FIs need to know about payments in the metaverse?

The metaverse economy could be worth $13 trillion by 2030, according to a recent report by Citibank. Naturally, financial institutions want to participate in this major growth opportunity, and industry leaders including JPMorgan Chase, HSBC, Amex, Visa, and Mastercard are actively exploring opportunities in the metaverse.

Of course, at the heart of a growing metaverse economy is the need for a robust payments ecosystem. Providing secure and convenient ways to pay for virtual goods will be essential to creating a fully immersive experience in the metaverse.

So, what kind of potential does the metaverse present for the payments industry? What are the opportunities to avail and challenges to tackle?

I spoke with five experts to understand why it's important to ask these questions now rather than years later, and to get their thoughts on how traditional FIs as well as fintechs should be thinking about metaverse payments.

1. Why is it important for financial firms to think about payments in the metaverse?

John Mitchell, co-founder and CEO of Episode Six:

Because it has the potential to be a $5 trillion-dollar business by some estimates. Sure, it's still in the early stages of its evolution, but that’s the best time to start thinking about it. If consumers are going to be spending time there, they’ll want seamless, flexible payments. Solve that, and it’s an opportunity to gain share in a rapidly expanding ecosystem.

Vijay Sondhi, CEO of NMI:

Financial institutions must start thinking about metaverse payments now so that they are set up for success when the metaverse economy is fully realized by both businesses and consumers. Many envision the metaverse as a virtual commerce space where consumers will be able to use different digital payment options, including mobile wallets, QR codes, and crypto. Financial firms need to implement solutions that can accept multiple payment methods today, with the flexibility to quickly implement new payment types for the evolving metaverse economy.

Consumer adoption of metaverse payments may take time, as this will be a new experience for many people and will include new types of digital currencies that are unfamiliar to many of today’s consumers or businesses. The speed at which payment providers enable digital and mobile payments will influence the speed at which consumers and businesses adopt payments in the metaverse.

Brent Johnson, CISO at Bluefin:

While the metaverse’s potential has not been fully realized yet, it could potentially play a big part in the future of the payments space. With big tech companies like Meta and Google already focused on the metaverse, the payments industry needs to make sure it’s not too far behind. The more financial firms support omnichannel, contactless, digital and mobile payments now, the easier it will be to implement those channels into the metaverse whenever companies see fit.

Additionally, the metaverse represents a vast virtual marketplace and likely varied payment ecosystems based on blockchain and digital currencies. If it’s anything like we’ve seen so far, each metaverse could have its own closed-loop payment ecosystem based on unique tokens/currencies. Financial firms should focus on providing interoperability between metaverse ecosystems and/or providing seamless on/off ramps between payment ecosystems and the “real” world. The more financial firms support crypto-to-fiat conversions, as well as embrace digital payment technology within the metaverse, the further along they’ll be.

2. What are the challenges associated with sending and receiving payments in the metaverse as opposed to the "real world"?

Bluefin’s Brent Johnson:

Current money transfer mechanisms in place for cards, such as SWIFT and ACH, are decades-old technologies and not suited to support metaverse-based payments. Additionally, crypto will represent a large percentage of payments in the metaverse, so merchants and card companies will have to ramp up their acceptance of crypto payments. We’ve already seen great progress in this area as Visa and Mastercard have begun allowing settlement via USDC, and millions of merchants now accept crypto payments directly. There will be so many new and unique use cases – like how easily can a merchant take metaverse token A, and use it in metaverse B? What’s the value in token A vs B? Does the merchant convert a sale to a stablecoin like USDC right away and then transfer it to their bank account in the real world?

On the less technical side, chargebacks could be another big issue with metaverse payments, as the marketplace will likely be based on blockchain. Future legislation, especially with regard to stablecoins, could also further dictate how payments are allowed to be sent and received in the metaverse, which could cause hurdles that don’t even exist yet for merchants.

Armen Najarian, chief marketing and identity officer at Outseer:

As all forms of payment in the metaverse are inherently digital, there are needs to educate both consumers and businesses around these new transaction models. Advanced authentication measures like facial and behavioral biometrics will play a significant role in this new model.

And with this shift, so too will follow payments fraud, since fraudsters follow the money. With Bloomberg Intelligence estimating that the metaverse economy could be worth as much as $800 billion by 2024 – and estimates from others, like JPMorgan Chase, putting that figure at $1 trillion annually – fraud operators are shifting their strategies.

Fraud in the metaverse is more lifelike and dangerous than it is in our current reality. Opportunities for facial distortion and altering physical identities will be real and prevalent.

3. Are payments providers, merchants and consumers ready for transactions in the metaverse? What do they need in order to prepare themselves?

Bluefin’s Brent Johnson:

In a word, no. It’s really a technology shift on the consumer and payment provider side. For consumers, I believe blockchain introduces new challenges and technologies that many aren’t familiar with. From digital wallets, cryptocurrencies, stablecoins, tokens and crypto exchanges, a lot of this will be foreign at first. But similar to the move from cash to checkbooks to credit cards, it’s simply a matter of getting used to it.

On the payment provider side, assuming the prediction on the use of blockchain is correct, it really shifts the dynamic and “need” for traditional gateways and processors, as payments are processed by node operators collecting transaction fees (with the exact method dependent on the blockchain in use).

Andrew Edem, global head of innovation at PPRO:

While payments providers and merchants have been building toward a virtual world for years now, many entities aren’t fully ready for transactions in the metaverse – but things have certainly leapt forward since the pandemic. Consumers are more comfortable than ever before with buying goods and services online, especially via smartphones, resulting in a seismic shift towards digital payments such as mobile wallets and P2P payment apps. This shift – combined with virtualization tools and enterprises that are helping to build the metaverse – signals that soon the ability to make purchases in the metaverse will not just be a reality, but widely popular among merchants and consumers too. One example where this reality is already being put into practice is gaming. Video games have built immersive worlds where digital currencies and goods are exchanged, allowing for payments providers and merchants to facilitate payments. To prepare for this shift, it’s crucial that payments providers and their partners have the right infrastructure to facilitate digital payments in a cost-effective and easy way – allowing for merchants and digital enterprises to then make the checkout experience effortless for consumers.

4. What role will blockchain and crypto play in metaverse payments?

Bluefin’s Brent Johnson:

While the metaverse will accept many forms of digital payments, crypto will lead the way, thanks to its inherently digital nature. The vast majority of metaverse merchants will accept crypto payments, and they will be supported by card companies and payment processors that service the metaverse. It’s possible people will buy everything including real-world goods, virtual clothes, virtual buildings/land, virtual comedy show tickets, and anything else you can imagine in the metaverse – and they will likely use cryptocurrencies to buy all of it.

Implementing blockchain technology will be critical to ensuring the metaverse economy is a fair and transparent ecosystem. This will be especially important in the early stages of the metaverse economy, where exchanging money this way will be new for everyone – making transparency critical to building consumers’ trust in metaverse payments. Additionally, as layer 1/2 blockchains continue to emerge, metaverse payments will become faster, more secure, more scalable, and more transparent over time.

Mastercard dropped an album – but why?

As consumers rely more on contactless payments and voice technology, harnessing a sonic brand could be more important than ever.

Around a month ago, Mastercard released an album containing ten songs – each integrating its sonic brand, which it published back in 2019. The album is called Priceless and was first made available on Spotify.

To release the album, Mastercard worked with Beatclub, a marketplace founded by producer Timbaland. As part of the deal, Mastercard is purchasing hundreds of one-year memberships and offering them to creators who are part of disenfranchised communities.

Mastercard first released its sound back in 2019, as part of its efforts to adjust its brand to a more digital-first environment. The decision to create an album could be a way to further zero in on the brand image Mastercard wants to emit – one that’s young, hip, and technology-forward.

Other card companies have also been diving into sonic branding waters. American Express recently adjusted its own sonic brand to be heard when people pay for stuff. Visa also has a sonic brand that it released back in 2017.

Consumers’ payment behavior is becoming more contactless – which means less looking at the card in use. That means payment companies need to make sure they’re still being noticed – if not seen, then at least heard.

It also may just be a wise step to take as we continue to step into a more sound-based environment. For example, earlier this year, WhatsApp reported that people are sending seven billion voice messages a day. Meanwhile, over 60% of consumers say they listen to podcasts, which could also signal a preference for ears over eyes. 

In short, if card companies can find a way to create a sound existence through sonic branding, they could potentially get a whole new sense to embed themselves within, and, at the very least, escape the wrath of ‘out of sight, out of mind’.

Highlights from our recent coverage

The Acquire Podcast Ep. 14: Affirm’s Erika White on capturing millennial humor, the flywheel effect, and marketing BNPL

This week on the Acquire Podcast, we’re joined by Erika White, VP of marketing and communications at Affirm. We spoke about building out a cheeky millennial-esque ad campaign, creating the flywheel effect through strong partner marketing, and some of the challenges and opportunities that come with marketing BNPL.

It’s digital, but is it green? The effects of payments on the environment, in 4 charts

Payments won’t be green until we tackle the emissions inherent to the smartphone industry. In 2021, the e-waste generated globally weighed as much as the Great Wall of China.

Marqeta’s Vidya Peters on the evolution of consumer behavior and payment trends

Consumer behavior underwent lasting changes during the pandemic – how can the tech behind digital transactions keep pace? Marqeta COO Vidya Peters talks about how ecommerce has changed customer spending habits and purchase patterns as a consequence of Covid-19, and what’s next in the evolution of payments.

What we're reading

  • American Express unveils cross-border payments tool for businesses (Finovate)
  • Messaging app Viber launches a digital wallet for paying bills, money transfers and buying goods (TechCrunch)
  • Mastercard Installments expands to support small businesses in the US (Finextra)
  • Jack Henry collaborates with Victor Technologies and MVB Bank on faster payments (PR Newswire)
  • Alphabet and Visa’s earnings spotlight real-time payments, digital wallet traction (PYMNTS)
  • Why a tiny credit union sued Apple over unfair tap-to-pay rule (The Financial Brand)
  • Balance raises $56 million to tip the one-click checkout scales in favor of B2B merchants (TechCrunch)
  • Amazon introduces a new digital wallet for sellers (Retail Dive)
  • Instacart and Chase launch new Mastercard credit card (The Paypers)
  • Revolut’s UK risk and compliance chiefs quit in slew of senior resignations (City A.M.)

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