Let’s say you run a business that specializes in (among other things) developing and operating physical product distribution and customer service centers. You and your employees are experts in all facets of this work — from acquiring real estate to staffing an efficient customer service operation.
The problem is that your industry is being dragged into the digital era where these skills that you’ve honed are basically worthless.
But — but! — then you hear about this new development — a digital ‘world’ that (mostly) adheres to to the spatial and scarcity constraints of the physical world and that (maybe) most of your customers will be spending most of their time in at some point in the future.
“Great!” you say. “We can port the distribution and customer service skills that we’ve spent decades honing in the physical world over to this new virtual world and position ourselves to be big winners when our customers eventually show up!”
Now I am going to use the remainder of this piece to argue the opposite — why banks (and fintech companies) shouldn’t build branches in the metaverse.
Let’s begin by trying to pin down a definition for the term ‘metaverse’.
The Evolving Internet
I’ll start here. I recently asked a very smart person that I know to predict how much time we, as a society, would be spending in the metaverse 10 years from now. His reply? About as much time as we do today. His reasoning for this answer is that the metaverse is really just a new term for describing a place we already spend most of our time — the internet.
This is an incisive observation. After all, you and I are interacting, virtually, right now. The interaction is asynchronous, but of course it could be synchronous as well. The metaverse is, quite literally in this sense, the online friends that we’ve made along the way.2
This is a useful starting place for our definition, but there’s something missing.
If the metaverse was simply the internet, Meta might still be called Facebook3 and it certainly wouldn’t be spending $10 billion this year on the development of virtual reality (VR) and augmented reality (AR) hardware and software.
But they aren’t and they are and that means we need a refined definition, which covers the incorporation of technologies like VR and AR.
I found this one, from a recent piece written by Mario Gabriele, to be extremely useful:
The metaverse is the internet, enhanced and upgraded to consistently deliver 3D content, spatially organized information and experiences, and real-time synchronous communication.
Now we’re getting somewhere!
The metaverse is the internet, but in its next evolutionary form; a form that seeks to maximize the the immersiveness of the experience for users.
Ben Thompson of Stratechery sums up this line of thinking nicely:
the Metaverse is the set of experiences that are completely online … which is to say that the Metaverse is already here. Sure, today’s experience is largely denominated by text and 2D, but video is already a major medium, first in the form of entertainment and now a vital tool for work. This is a trajectory that, in my estimation, inexorably leads to virtual reality: if all that matters is digital, why wouldn’t you want the most immersive experience possible?
OK, so if the metaverse is where we (humans that use the internet) are inevitably headed, then why shouldn’t banks and fintech companies rush into this new world, full steam ahead?
The simple answer? It’s not ready yet.
What Web2 Has Become Great At
A nuance that gets lost in the silly web2 vs. web3 debate is that web2 (loosely defined as the internet post-Facebook and Twitter and YouTube) has, by virtue of having been around for a while, evolved from a monolithic set of services and experiences designed to appeal to everyone into a diverse ecosystem of online communities designed to appeal to the smallest possible niches and subgroups.
Here’s Ben Thompson again (emphasis mine):
Facebook and Twitter represented Social Networking 1.0, where you were expected to be your whole self online; that expectation, though, was like a legacy company using computers to run their analog business model: it may have been more efficient, but it wasn’t at all an optimal use of technology. The entire magic of software is that it is malleable and scalable, and those qualities extend to users creating completely different personas and experiences based on the particular online community that they have joined.
When Facebook and Twitter and YouTube started, they were built to appeal to the broadest possible audience. This makes sense! The platforms had to attract users from all the diverse corners of the web1 internet in order to achieve scale and start benefiting from network effects. Hence cat videos on YouTube.
But as the platforms scaled and matured, the nature of how they were used shifted. Subgroups on these platforms started coalescing around shared experiences, interests, and identities. Hence YouTube’s BookTube community, which my wife (a fanatical reader) swears by and that I had never heard of before and never would have stumbled upon in a million years on my own.
And this is representative, broadly speaking, of the internet that we have today. Facebook groups are used by over 1.8 billion people every month. There are more than one billion groups on WhatsApp. Reddit has 1.2 million subreddits, 138,000 of which are active (and often highly influential, as r/wallstreetbets demonstrated last year). Overall, 77% of internet-using consumers say that the most important group they're a part of now operates online.
Looking into the immediate future, I think it’s entirely reasonable to expect that the first wave of companies building experiences in the metaverse — Meta, Decentraland, The Sandbox — will intentionally design those experiences to be as broadly appealing as possible in order to quickly attract users and start generating network effects.
In the case of Meta’s virtual reality game Horizon Worlds, I can personally attest that the experience is utterly bland and inoffensive. And descriptions I’ve read of other virtual worlds sound similarly generic.
Again, this isn’t a bad thing. It’s by design.
One day, if the universal experience of spending time in the metaverse becomes sufficiently enjoyable4, I could see a similar pattern to what has happened with web2 playing out — a massive number of people interacting in the metaverse will split off into a myriad of different affinity and identity-centric communities.
The Golden Age of Digital Community Banks
Thinking about the cyclical contraction (new, broadly appealing experience) and expansion (diverse, community-driven experiences) of the internet, it’s clear to me that the opportunities for financial services companies to leverage the internet to deliver value for customers change significantly, depending on where in that cycle we are.
When disruptive companies introduce new digital experiences that appeal to a broad set of users, they aggregate demand from those users and, as a consequence, become entrenched as critical acquisition channels for other companies trying to reach those users.5
However, when users begin to disperse, spending more of their time interacting in niche communities and subgroups on these platforms, a new opportunity to create value emerges — digital community banks.
As I’ve written before, a digital community bank can be created to serve virtually any group of customers, as long as that group has a specific set of unmet functional and emotional needs and is bound together by a durable and self-organizing identity.
And with the costs to spin up a bank never having been lower (thanks fintech infrastructure companies!) and the number of niche communities self-organizing on the internet never having been higher, we’re now entering the golden age of digital community banks.
Banks and fintech companies that haven’t embraced the digital community trend should strongly consider it. There’s plenty of whitespace left to attack.
At some point in the future, it’s possible (perhaps likely, given the amount of money being invested) that the various 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 perhaps customer service) channel.6
But we’re not there yet, as Mario Gabriele colorfully illustrates in his piece on Decentraland:
I have also walked around empty lots and whole neighborhoods without a soul in sight. At around noon on a Tuesday, I stood in Frankie's Tavern, a virtual dive bar, watching a music video alone. After hearing about District X, Decentraland's red-light district, I fruitlessly searched for brothels that apparently exist.
Until the metaverse is a little less empty, resist the temptation to colonize it with branches and billboards.
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1.) Apple Tap-to-Pay taps payment partners.
Apple has announced plans to introduce a new Tap to Pay feature for iPhone that turns the device into a contactless payment terminal. U.S. merchants will be able to accept Apple Pay and other contactless payments, including Google Pay and contactless credit and debit cards, by using an iPhone and a partner-enabled iOS app.
Short take: I’m surprised. Apple is making this capability available through partners (Stripe is up first) rather than restricting it to just Apple Pay. Not their usual M.O., which makes me think that they’re a little worried about driving merchant adoption given the ubiquity of dongle-based solutions from companies like Block.
2.) Crypto companies attempt to self-regulate.
Several big crypto companies, including Coinbase, Circle and Anchorage Digital, launched the Crypto Market Integrity Coalition, which is taking aim at “manipulation and abuse.”
Short take: This is a smart and very common lobbying tactic, but the rubber will meet the road when one of the members of the coalition has to make a tough choice on growth vs. customer/investor protection. Take Coinbase as an example. It will soon be launching a marketplace for buying and selling NFTs. The NFT market is absolutely rife with scams and plagiarism and wash trading. Incumbent platforms like OpenSea and LooksRare have mostly avoided cracking down on this behavior for fear of driving creators and investors away. Will Coinbase voluntarily hold itself to higher standard as it attempts to unseat those incumbents?
3.) Like Genghis Khan, but with more pizzazz.
The Department of Justice announced the arrest of Ilya Lichtenstein and Heather Morgan, who allegedly attempted to launder more than 25,000 Bitcoins that were stolen as part of the 2016 hack of Hong Kong-based cryptocurrency exchange Bitfinex.
Short take: I don’t really have any meaningful analysis to add here, but I feel compelled to point out that Heather Morgan is (among many other things) an amateur rapper, who performs under the name Razzlekhan, who she describes as “like Genghis Khan, but with more pizzazz.” And within Razzlekhan’s discography is a track titled “SaaSholes”, which have lyrics that truly need to be seen to be believed (warning — you can’t unsee this, so proceed at your own risk).
It’s here! It’s here! It’s here!
Cornerstone Advisor’s What’s Going on in Banking 2022 report is now available!
If you have any interest at all in what U.S. banks and credit unions are planning to do this year (and if you work in fintech then you should care), this report is invaluable.
You can download the report, for free, here.
Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.
Quotes like this shouldn’t inspire FOMO in anyone, but they probably do (sigh):
“Instead of building brick-and-mortar bank branches in meatspace, we're gonna build a Gemini experience in different metaverses, where you can go into Gemini and trade, but it would be immersive instead of on your phone.” — Tyler Winklevoss
Speaking of which, it’s been an absolute joy getting to know many of the folks that subscribe to Fintech Takes over the last couple of years. If we haven’t met yet, please feel free to reach out!
Or it might not. The great rebrand was also (mostly?) an exercise in PR damage control.
Right now, from a hardware perspective, it feels an awful lot like having a big tablet strapped to my face, which hasn’t been awesome for my neck or back.
Theoretically, this is where web3 and crypto could shake things up. Unlike web2, where aggregators are able to lock-in users and command high take rates from participants on their platforms for a long time, web3 users will be able to move seamlessly between platforms, which will force web3 platforms to keep their take rates low. Again, that’s the theory. I’m a bit skeptical that it will play out exactly that way.
It’s very possible that this is a generational thing. My youngest son has taken to the metaverse like a fish to water.