JPMorgan takes its business to the metaverse

Hello readers, and welcome back to The Future of Money.

Here in the UK we’ve got our third prime minister this year, Rishi Sunak. As chancellor under Boris Johnson, Sunak voiced support for the fintech sector — notably crypto. I’ll be watching to see what regulatory approach he takes as his new government faces one of the toughest outlooks in living memory.

Meanwhile, this week I’ll be looking out for UK bank results, which we expect to be distinctly healthy. Rising interest rates are likely to boost the bottom line of high street lenders, with credit quality yet to deteriorate.

This will probably prompt some awkward questions, given the cost of living crisis; we can also expect to see more moves by banks to snap up fintechs, which have seen valuations falling.

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Latest news

• Goldman execs clashed over Marcus before the lender’s retreat from retail banking, Josh Franklin reports. The retail arm of the Wall Street bank has been split in two, amid investor unease over its lossmaking performance.

• Wise, the UK fintech formerly known as TransferWise, has increased its average prices for transfers — the first time it’s done so since 2020. The company has said high volatility in markets was to blame.

• Lex opines on American Express’ loan-loss reserves, and argues that investors should not take fright. Credit quality remains healthy so far (not least in Amex’s affluent user base), and inflation boosts fees and revenue.

JPMorgan’s ‘investment in the future’

The metaverse is a notoriously slippery concept, often thought to be in large part a combination of advertising spiel and fiction. Many metaverse projects seem to hark back to the 1990s with their utopian ideals of digital worlds, poor graphics and limited functionality.

Meta’s efforts — and its latest leg-related gaffe — reflect the not inconsiderable challenges in making something new and fresh.

But the core idea that virtual worlds will remain big business in the future feels like a safer bet than claiming that people will want to live in them. JPMorgan’s strategic investment in Tilia, the payments platform from Second Life creators Linden Labs, is indicative of the financial services sector’s opportunities in the space.

“We see people spending more and more of their time [in virtual worlds], buying and selling things,” said Max Neukirchen, global head of payments and commerce solutions at JPMorgan. “Overall, volumes are growing strong and our presence in the metaverse is primarily an investment in the future.”

While JPMorgan at the start of the year opened a “lounge” in one of the newer metaverses, Decentraland, the investment in Tilia feels rather more solid.

The platform was built for Second Life itself, which first launched in 2003, as a way to convert tokens used in the game into fiat currency. Tilia is also licensed to transfer money in the US.

But for Brad Oberwager, executive chair of Linden Labs and Tilia, the platform offers a path for other virtual worlds to support their economies.

“All these universes are social economies — to make them work, you need to get money into the system and move it within the system,” said Oberwager. “It doesn’t work well with fiat — transactions are too fast, small and numerous.” But crypto is not an ideal alternative either, he added, with currencies proving wildly volatile.

The current crop of metaverses typically price in-game items in cryptocurrencies — the values of which cratered earlier this year.

In the longer term, Oberwager imagines some form of stablecoin being developed for virtual worlds, though he is clear that this remains far in the distance.

Neukirchen added that JPMorgan’s established payments business gives it a strong starting position.

“Some of the fintech competitors are tech native but they often need partners — in particular banking partners — to actually offer the full suite of financial services,” he said.

The idea that humanity will plug into VR to spend all their time in digital worlds feels misguided — one lesson of the pandemic for many is that they desire at least some human contact.

But the scale of these digital worlds — for socialising and gaming — is likely to grow. The battle among banks and fintechs to enter the space will heat up too.

Quotable

“You’re going to need to build a reputation but you’re also wanting to be completely anonymous at times. You’ll see identity getting tied into finance.” — Brad Oberwager, Tilia and Linden Labs

I’ve had lots of interesting discussions with Oberwager in recent weeks, and one topic which he’s touched on a couple of times is digital identity.

The topic was front of mind for the government during the Covid-19 pandemic, when there was robust debate about how to tell who was vaccinated. (In the west, most countries opted for approaches which didn’t require digital identity.)

But the subject has become increasingly relevant for fintechs, with work on central bank digital currencies continuing around the world (the Bank of England is currently looking for companies to carry out a proof of concept around offline payments).

If CBDCs are to become mainstream, big questions are yet to be answered as to how privacy can be preserved. The ideals of financial inclusion will be hard to achieve if users distrust the next iteration of cash.

Recommended Reading

Europe’s superapp Amy O’Brien in Sifted has a rundown on the contenders to become Europe’s first financial superapp, comparing Revolut, Lydia, Klarna and Bolt. Though as investors point out, Europeans shouldn’t expect the type of comprehensive all-in-one-apps that are popular in Asia.

N26 pushes into crypto German neobank N26 is going after the digital asset market through a partnership with trading app Bitpanda, reports Romain Dillet in TechCrunch. The new feature will include more than 100 assets.

JPMorgan invests in gaming platform Tilia wasn’t the only strategic investment announced last week — JPMorgan has also invested in Sightline Payments, which supports cashless casinos.