Finance, digitization, and the metaverse

From inertia to innovation

Financial services’ appetite for innovation was modest, if not negligible, for many years. From mountains of paperwork to epic turnaround times, from entrenched inaccessibility to tales of bank managers judging loan applications on the basis of a borrower’s golf club membership, the industry was seldom renowned as a hotbed of progress.

The landscape has altered dramatically of late. Today, amid the ongoing rise of fintech, financial services’ willingness to encourage and embrace new ideas is largely unrivaled. Spurred by advances such as big data, artificial intelligence (AI) and machine learning (ML), the digitization of this sphere is in full swing.

According to a study by the World Bank, the World Economic Forum and Cambridge Judge Business School’s Centre for Alternative Finance, almost every component of the fintech market saw continued growth as COVID-19 took hold last year. Fintech proved not only resilient and adaptable: it also proved highly beneficial¹ for multiple stakeholders.

With the pandemic functioning as an accelerant of change, more and more people are now availing themselves of financial services. In the arena in which I work, asset management, we are increasingly witnessing the democratization of investing. The likes of blockchain, tokenization and Open Finance are redefining the possible on an enormous scale.

Yet we should not lose sight of the fact that other fields are producing developments that are equally disruptive – if not more so – and that some will very likely further transform both how we operate and, crucially, how we serve our clients. Such developments are sometimes categorized not as fintech but as techfin.

One such is the metaverse, a concept currently gaining significant ground in Big Tech circles and beyond. If or when this envisaged breakthrough becomes a reality – as its proponents fully expect that it will – the digitization of financial services will be taken to another level altogether.

What is the metaverse?

Isaac Asimov described the job of science-fiction writers as to “foresee the inevitable”. Seemingly reflecting this maxim, the metaverse first appeared in a sci-fi novel, Snow Crash, almost 30 years ago.

The book’s author, Neal Stephenson, envisioned a 3D virtual space in which humans – in the form of avatars – could engage both with each other and with various elements of software. Similar constructs later featured in works such as The Matrix and Ready Player One.

Some of technology’s major figures are now committed to turning science-fiction into science-fact. In June this year, for example, Facebook CEO Mark Zuckerberg declared that the company’s overarching objective would be to “help bring the metaverse to life”.

Speaking in a subsequent interview², Zuckerberg teased the prospect of “an embodied internet”. “Instead of just viewing content,” he said, “you’re in it. And you feel present with other people, as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or a webpage.”

In other words, consider all that we can nowadays achieve via our smartphones, tablets, laptops and so on – shopping, socializing, gaming, live-streaming, reading, learning – and then try to picture these acts as truly immersive. As Zuckerberg also observed: “We’re basically mediating our lives and our communications through these small, glowing rectangles. I think that’s not really how people are made to interact.”

There are perhaps three compelling reasons why the metaverse could be an extremely interesting development. It could revolutionize client-provider relationships; it could further elevate the notion of tech as a source of enhanced performance; and it could present extraordinary investment opportunities. Let us examine each of these aspects in turn.

Smart relationships and beyond

Face-to-face relationships constituted one of the main organizational casualties of the COVID-19 crisis. Research³ revealed that more than two-thirds of asset managers found the consequent absence of in-person contact “challenging”.

It was innovation that rapidly filled the void, with video-conferencing platforms such as Teams and Zoom emerging to establish a new normal. As many financial services businesses have been quick to grasp, these need not be forever viewed merely as stopgaps made good.

Combining such platforms with additional state-of-the-art virtual meeting tools – including analytics, diagnostics and other information sources that can be brought to bear almost instantly – has led to the advent of what we might call “smart relationships”. These can add value that even face-to-face get-togethers might struggle to yield – say, by supplying clients with relevant insights and data immediately upon request.

The result is a real-time decision-support system that is capable of generating non-investment alpha. Naturally, the principal criticism of this approach is that it still lacks the human dynamic required to engender the trust traditionally at the heart of client-provider interactions. The same might be said of many facets of digitized, “frictionless” financial services.

The metaverse could go a long way toward addressing this shortcoming. For instance, a client and an adviser would be able to draw on all the power of digital finance during a virtual discussion – and at the same time, somewhere in the 3D space Stephenson originally evoked nearly three decades ago, both would in effect be “there”.

Performance from progress

Innovation has repeatedly shown itself to be a key driver of performance in myriad fields. The financial services industry offers no exception, as the past few years in particular have illustrated.

A superabundance of data and the use of AI and ML have clearly improved the science of finance. Data has become the lifeblood of almost every investment decision, and we all recognize that machines have a manifest advantage over their flesh-and-blood counterparts when sifting through vast quantities of it.

Again, this does not mean that humans no longer have a place. Financial services clients are becoming ever more savvy and sophisticated – as are consumers in general – and many of them understand the potential limitations of the purely robotic route.

The ideal instead lies in maximizing respective strengths. Clients appreciate the role of data, AI and ML; but they also appreciate the expertise, guidance and reassurance that they receive from their fellow Homo sapiens.

Here, too, the metaverse should build on the foundations that fintech has already assembled. Imagine being able to watch AI and ML do their “heavy lifting” while a portfolio manager almost literally walks you through the decisions stemming from their analysis.

As venture capitalist Matthew Ball has remarked, we are moving toward “an experience that spans both the digital and physical worlds... [with] unprecedented interoperability of data, digital items/assets, content and so on”. As such, the metaverse should serve as an unrivaled theatre for blending the respective talents of computers and humans – and for delivering superior outcomes.

Picks and shovels

The third way in which we might benefit from the metaverse, of course, is to make money from it. Augmented/virtual reality (AR/VR) has frequently been touted as the “next big thing.” but the metaverse seems set to propel us even beyond that.

Importantly, it is not just Big Tech that is striving to “help bring the metaverse to life”. Many less high-profile players are chasing the same goal. In 2015, the year Facebook acquired VR specialist Oculus, Zuckerberg argued for purchasing Unity, a leading designer of game engines, which has since stated that its mission is to “be the 3D operating system of the world”.

As with the internet, nobody will “own” the metaverse per se; but some will undoubtedly shape it more than others. As it gradually crystallizes – this is certainly not a phenomenon that will materialize overnight – we can expect numerous contributors, from individuals to start-ups to global enterprises, to play a part in its creation and operation.

Not for the first time, the gathering frenzy has echoes of the California Gold Rush of the 1840s and 1850s. Now, as then, it may be most prudent to invest in picks and shovels – that is, the companies that enable a product rather than the product itself.

It might also be worth remembering that successful investing is usually a long-term activity. It could be many years before the metaverse is realized, but the histories of the once-hidden gems behind landmark disruptions such as the world wide web and smartphones should be sufficient to remind us that foresight and patience are potent weapons in any investors’ armory.

With both fintech and techfin consistently breaking new ground, the pace of innovation and digitization in financial services shows little sign of abating. This is a fascinating time for providers, clients, investors and stakeholders – and it looks poised to become more fascinating still.