OBSERVATIONS FROM THE FINTECH SNARK TANK
Amidst all the hype about the metaverse, observers are attempting to describe what it means for the banking industry. EuroMoney wrote:
“Incumbent banks are already being disrupted by blockchain technology, crypto assets, decentralized finance protocols, and distributed autonomous organizations. Now comes a new challenge. Goldman Sachs technology analyst Eric Sheridan estimates that with roughly 33% of the digital economy shifting to the metaverse and 25% market expansion, we arrive at a $ 12.5 trillion opportunity. “
“[Metaverse] transactions require some type of financial infrastructure. But traditional financial institutions may not be primary players in the Metaverse. Most are still hovering on the periphery of decentralized finance. When the Metaverse launches, digital banks will be in the perfect position to facilitate transactions. DeFi protocols will also quickly adapt and position themselves as major players. “
There are some big — and perhaps misleading — assumptions built into these comments.
A third of the digital economy may very well shift to the metaverse — but how long will that take?
With the help of the pandemic, eCommerce sales accounted for 20% of global retail sales in 2021. If it’s taken 20+ years for eCommerce to reach 20% market share, it’s hard to believe that the metaverse will capture a third of that in a short period of time.
Regarding the role of traditional financial institutions in decentralized finance, TechBullion is being generous — most aren’t anywhere close to “hovering on the periphery” of DeFi.
But the idea that “digital banks will be in the perfect position to facilitate transactions” in the metaverse is ludicrous. Most of today’s “digital” banks are little more than traditional banks sans branches. If “DeFi will rule the metaverse” —which is not a foregone conclusion — then digital banks are hardly in a “perfect position.”
Bank Branches in the Metaverse Are a Silly Idea
Then there are those that believe banks should establish bank branches in the metaverse.
According to IBS Intelligence:
“Virtual branches are the next logical step for how financial institutions can utilize virtual reality. Imagine never having to take a break during working hours and wait in a line at the bank. Now imagine getting personalized banking service at the comfort of your home, when it’s convenient for you while enjoying a cup of coffee. “
I don’t have to “imagine” that — I already have it. It’s called a mobile banking app.
There’s a good reason why metaverse bank branches are the wrong path for banks to go down. As Cornerstone Advisors’ Director of Fintech Research Alex Johnson wrote in his Fintech Takes newsletter:
“At some point in the future, it’s possible that the digital worlds being built today will have aggregated sufficient user attention and engagement that financial services companies will need to invest in the metaverse as an acquisition and customer service channel. But we’re not there yet. Until the metaverse is a little less empty, resist the temptation to colonize it with branches and billboards. “
The Money in the Metaverse for Banks is in Financing It
What Johnson is saying is that — for right now, at least — there is no money in the metaverse.
Building a bank branch in the metaverse is like living in a developer’s spec house while the builder is still laying the sewage pipes, paving the roads, and building the other homes in the neighborhood. Doesn’t sound appealing to me.
The “money in the metaverse” isn’t in the metaverse right now. It’s in building the metaverse.
While large companies and celebrities have the money to buy their little corner of the metaverse, smaller companies and entrepreneurs are scouting out their opportunities.
In December 2021, a Snoop Dogg fan paid $ 450,000 to purchase land next to Dogg’s virtual property. The Snoopverse — which includes 22 plots of lands, 67 plots of premium land, and 3 estates — enables land owners to build on their plots and profit off other residents who visit.
Virtual real estate sales are skyrocketing.
The Sandbox is the largest virtual world in terms of transaction volumes, with 65,000 transactions in virtual land totaling $ 350 million in 2021. Decentraland — the second largest virtual world — saw 21,000 real estate transactions worth $ 110 million last year.
For both virtual worlds, the average investment in land was about $ 5,300, but prices have grown considerably from an average of $ 100 per land in January 2021 to $ 15,000 in December 2021, with rapid growth in the fourth quarter when the Sandbox Alpha was released.
In the past month, sales of property on the six most popular virtual worlds brought in more than 52,000 ETH — roughly $ 169 million — on NFT trading platform OpenSea.
The Metaverse Lending Opportunity for Banks
In the real world, many people purchase real estate by getting a mortgage. This is becoming an option for the metaverse, as well. TerraZero Technologies has just provided the first-ever metaverse mortgage to buy virtual real estate.
But as Dan Reitzig, CEO of TerraZero, told Bloomberg, it’s more like a small business loan than a consumer loan. TerraZero evaluates borrowers’ business plans for making money using the virtual land, and doesn’t base their loan decisions on speculations of rising land prices.
Metaverse Lending = Small Business Lending
Reitzig’s point can’t be overstated. A “mortgage” isn’t the right analogy for purchasing virtual property in the metaverse. Commercial real estate lending is the better analogy.
Metaverse property prices rose 700% in 2021, but it isn’t just price speculation that’s driving the increase — it’s the opportunity to monetize virtual land with games, events, and other revenue-producing ideas.
Banks have developed a competency in evaluating real real estate lending. Smart and entrepreneurial banks will develop the capability to evaluate virtual real estate lending, as well. Many of the same principles apply to both types of assets.
Much like early movers into the metaverse are trying to establish their “metaverse brand,” early lenders will be able to establish themselves as “metaverse lenders.”
And they won’t even need to open a branch in the metaverse.