Silicon, the Metaverse, Banking
buy the rumor, sell the news
One of the things that Wall Street, which is to say, traditional finance, or, more archly, tradfin, doesn’t get is silicon. Oh, sure, they understand that silicon is an element in the periodic table, and that their beaches in the Hamptons are full of it. But what Wall Street, or at least its investment bankers, wealth advisors, and assorted other intermediaries, don’t understand is that technology, or silicon, is blowing apart their business models.
And I’m not talking here about Goldman Sachs CEO David Solomon’s ire at an underling having the temerity to introduce himself to King Solomon at a lunch in the middle of the work day. No, what I am referring to is this: banking is being disrupted by silicon.
I listened to an interesting podcast earlier today, in which Richard Sosa interviewed Julia Carreon. The description is worth quoting because it bears direct relevance to this post: “Richard sits down with Julia Carreon, who is a major advocate for innovation and technology in the financial services industry. Today, Julia providers us with a detailed roadmap for Banks or other companies looking to stay relevant via technology investment.”
I commented on Twitter:
Here’s the problem: it is both correct that banks need to innovate, and that they cannot, structurally, innovate. They don’t have the appropriate cultures or incentives to be led by technology. Technology is seen as a cost center rather than a revenue generator, and he who makes the cash register ring wields power.
That’s a hard mental model to grok if you come from the technology world. In the technology industry, and especially in tech startups, all cash flows through code: develop a better algorithm or feature set than your competitors, and cash will flow into your company. And, as Jeff Dean could tell you, this redounds to your benefit. You become a technological big swinging dick. But banks don’t work that way because cash doesn’t flow into the bank through code, but rather through deals, clients, fees, etc.
Here’s the problem. Our future (i.e., the next 20 years) looks a lot more like Ready Player One’s metaverse than it does the movie Wall St.
We are rapidly headed to a world in which vast amounts of commerce and other economic activity is conducted inside virtual universes. Those shitty Roblox things your kid plays with incessantly? Welcome to the metaverse:
It is this digital place that your mind’s eye gets transported into. It’s immersive. We think it’s important that it is vast and diverse, and that you can move around. I think a lot of people have that vision.
What’s different for us is that the metaverse is an inherently a social place. It’s this shared experience. So your identity becomes important. This ability to be able to have social interactions and maintain and actually make friendships becomes super important. What the internet is for information, the metaverse is going to do for social connections. I’m no longer bound by physical distance or all these constraints in terms of who I interact with or how I represent who I am. All these things are suddenly unleashed. It’s insanely disruptive.
Lastly, if you have a metaverse, it has to start to evolve the constructs of a society. We need to think about rules of order. What’s allowed, what’s not allowed? How are those rules enforced, and are they aligned with real-world laws? What happens in different countries?
You also need to have an integrated economy. You need to make sure that people can make a living. We have our own currency, Robux, and we have our own economy. We do think about rules of order and enforcing them. We’ve really tried to be very thoughtful about what it means to have this kind of online place and how to make it a productive, good place to go.
(Bold is my emphasis.) How the hell are the banks going to compete with that? Now, you may have read the above, and thought to yourself, “Well, that sounds nice, but that’s for kids, and banks, well, that’s for grownups!” But today’s kids are the banks’ future customers. And those future customers will come to expect fully digital, virtual experiences for all their financial needs.
If you don’t believe Roblux’s vision for the future of commerce being digital, maybe reading Linda Xie on NFTs will convince you (you’ve grokked what NFTs are, right?):
NFTs are powerful because, when combined with other financial building blocks on Ethereum, they allow anyone to issue, own, and trade them. This makes interacting with NFTs significantly more efficient than traditional platforms. The same reason why cryptocurrency used in payments is more efficient than traditional payments, that it is borderless and significantly easier to transfer, applies to NFTs. For example, if you want to create tradable in-game items as a game developer, then you can instantly have them be tradable through protocols that allow for decentralized exchange of NFTs. You don’t have to create your own marketplace or go through the onboarding process of a centralized platform in order to have the items be tradable.
NFTs are rapidly acquiring all the accoutrements of what banks traditionally have done! “Surely,” you’re responding, “these platforms are small and won’t amount to much.” Well, no. One research firm estimates that 2.7 billion gamers world wide will spend $160 billion in 2020 on games and in-game items, growing to more than $200 billion by 2023. eSports, which entails watching other people play video games (yes, really), has grown significantly:
Between 2018 and 2019, there was a 12.3% increase year over year. In 2019, there were 245 million casual viewers and 198 million enthusiasts, making the total audience 443 million.
All of these virtual and digital participants are conducting financial transactions (sometimes on their parents’ credit cards). But as they graduate high school, go to college, and move out on their own, guess what? They’re not going to suddenly go down the street to the local savings bank and fill out reams of paper work to get a mortgage. They’re going to expect to do everything digitally, with as little friction as it now takes them to build a Roblux game.
That’s the future that banks must contend with, and with which they can’t contend.