First cryptocurrency, now the metaverse: Time for banks to pivot again

Cryptocurrency and the metaverse exist separately, yet each has the potential to advance the other: Digital currency fuels the growth of virtual worlds, and immersive 3D experiences provide opportunities for commerce and spending.

For retail and commercial banks, it’s time to prepare for the convergence of the two. It was just a short time ago that financial institutions needed to respond to pandemic-driven changes in banking behaviors; now they need to move quickly once again, this time in an environment in which the outcomes are largely unknown, and the best investment of time and capital is uncertain.

Success will require a four-pronged approach that includes identifying your role in the crypto ecosystem, developing a customer-centric strategy, identifying the technical challenges involved and applying a spirit of experimentation.

Crypto and metaverse: natural companions

Consumer awareness of cryptocurrency has grown too large for banks to dismiss. As of late 2021, 31% of Americans ages 18 to 29 said they’d invested in, traded or used a cryptocurrency such as Bitcoin or Ether. That age group includes the tail end of the millennials and the oldest members of Gen Z—the sweet spot of young consumers that banks want to attract for their lucrative customer lifetime value.

2022’s “crypto winter” may have cooled interest in virtual currency and the metaverse, but Wall Street’s financial players appear undeterred, and the currency will likely rebound over time, with less volatility. Most leading and emerging economies are experimenting with government-backed cryptos, known as central bank digital currencies, or CBDCs. As a form of payment, crypto is a rising player, with 85% of big retailers accepting cryptocurrency as payment.

It’s the earliest days of the metaverse, and the focus on virtual worlds so far has been on community and content, with gaming as the breakout application. If sheer awareness is an indicator, however, the metaverse looms as an essential channel for banks: In a six-month period, the number of global consumers who said they’d heard of the metaverse jumped 131%, from 32% in July 2021 to 74% in March 2022.

Taken together, the trends in cryptocurrency and the metaverse highlight the paradigm shift that’s underway for banking. While today’s customer relationships are largely transactional, the metaverse’s 3D immersive reality emphasizes experience over transaction.

Act before disruption occurs

The key for banks is to act quickly—before disruption occurs. The pandemic was that rare event for which the response was crystal clear: Digital processes were the answer for the needs of housebound employees and customers alike.

The path to convergence of crypto and the metaverse is far less defined. Here are four ways banks can begin to plot their crypto/metaverse strategy moving forward:

• Determine your role in the cryptocurrency ecosystem. A fundamental question facing every bank is to determine whether its business model will include monetizing crypto—as a crypto wallet partner or a crypto transaction processing platform, for example—or adopting crypto as a service for client acquisition and retention.
  
  Some banks will settle on a hybrid approach that includes both monetizing crypto and adopting it as a service. Whatever the strategy, it’s essential to have a plan in place before market circumstances force one on you.
  
• Identify the needs of your market segments. The crypto/metaverse strategy needs to be highly tuned to the needs of the bank’s market segments, especially when competing against fintechs and neobanks. Doing so requires a return to customer basics: What are your customers’ likes, dislikes and preferences?
  
  When expanding into new markets like cryptocurrency and the metaverse, success requires pinpoint accuracy in knowing how to serve customers and deliver value for them, profitably. Identify tangible use cases and prioritize them to establish early-mover advantages.
  
• Understand your technology strengths and challenges. The good news is, most financial institutions already have modernization initiatives under way and a framework in place for building virtual experiences.
  
  Other technology challenges await, however. A lack of interoperability and standards are among the biggest challenges for cryptocurrency and the metaverse. For instance, while blockchains can potentially facilitate faster payments and remittances, as well as capital and credit services, they can’t currently share or transfer data and complete transactions between one another.
  
  Similarly, there’s no standard file format for 3D content. Virtual platforms like Fortnite and Roblox remain unable to communicate with each other. Hoping to open up the metaverse are newly formed standards organizations such as the Inter-Blockchain Communication (IBC) open-source protocol and the Metaverse Standards Forum.
  
  Because the metaverse is not only a new channel but also a new commerce domain, it ups the ante for channel integration—already a tough challenge for banks. What are the ramifications for banks when a customer wants to begin a mortgage application offline, pick it up in the metaverse and then sign it through the mobile app? Security is a priority, as is authentication of customers across virtual platforms, mobile devices, phone and web-based platforms. What’s more, real-time execution requires an orchestration layer and channels that can talk to each other.
  
  The ability to understand data on-site continues to be a battleground for banks as institutions move to marry data and automate next-best action recommendations. Harnessing data and curating experiences will become even more critical as commerce extends into virtual reality.
  
  
• Instill a spirit of experimentation. Prioritizing a crypto/metaverse strategy and roadmap starts with basic investments: the ability to scale the physical and virtual worlds as well as geographies, ecosystems and blockchains. It then grows into bigger, bolder initiatives that require a mix of strategic vision and the willingness to fail.
  
  By launching pilots and learning from them, banks can avoid overcommitment of resources and reduce risk.

The metaverse holds significant promise over the next five to 10 years. And “stable” crypto will, in all likelihood, be the currency of the metaverse. Big Tech is laser-focused on the metaverse experience—and the commerce opportunity behind it. Banks need to take action to remain in the game.