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The opportunities for financial institutions in the metaverse go beyond simply offering conventional services in this new digital space. Countless new businesses and markets are being created through the trade of intangible products like non-fungible tokens (NFTs) in the metaverse.

Virtual commodities in the art and fashion sectors have also seen strong investment, with the transactions underlying these purchases potentially benefiting from the involvement of players in the financial industry.

From What will financial services look like in the metaverse? – Fintech Talents:

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It is not unreasonable to be sceptical. Jeffrey Funk, Lee Vinsel, and Patrick McConnell write in some detail about what they call the Metaverse “bubble” and go on to examine the economic effects of bubbles by comparing this technology bubble to past ones. They say that the biggest difference is that some goods did emerge from the dot-com bubble but “probably not much will result from the current bubble”. I am not convinced by this argument, because the goods here are not the Metaverse itself (however interesting and entertaining that might be) but because it will become a nexus for safer commercial interaction and the location of better, cheaper and faster financial services.

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Offering consumers a digital version of an official, government-issued state ID requires the official sanction and endorsement of the government in question, and Apple has reportedly spent months negotiating with various state governments in the US. Presumably, Google has been doing the same, and it seems fair to expect some information about which states will be among the first to support its own digital ID system when the beta feature rolls out this month.

From Google Play Changelog Points to Beta Launch of Digital IDs – Mobile ID World:

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oogle is preparing to follow through with a beta launch of its own digital ID solution, suggests a technical document pertaining to a Google Play System update slated for this month. As XDA Developers notes, the partial changelog includes a “Beta feature to allow users from selected US state(s) to digitize their state ID/driver’s license into the Google Wallet for convenient, private and secure presentation.”

From Google Play Changelog Points to Beta Launch of Digital IDs – Mobile ID World:

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Our six Deutsche Bank experts believe that the most likely future scenario in the future is one of multiple metaverse ecosystems, but which allow interoperability through standard solutions and protocols for digital identity, credentials, and asset ownership. The metaverse could usher in the next e-commerce revolution as it gains traction through advances in technology and becomes more mainstream. Financial services firms have a significant role in powering this evolution.

From Metaverse – the next e-commerce revolution – Corporates and Institutions:

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In the first half of 2022, the price of every major cryptocurrency dropped following the collapse of TerraUSD and LUNA. Now, multiple crypto-related companies are facing serious financial difficulties, including insolvency. In November 2022, crypto exchanges FTX and FTX.US filed for Chapter 11 bankruptcy. The fallout of this crypto crash is ongoing. This period of market cooling has become known as “crypto winter.”

From Crypto Winter 2022: What Happened? – NerdWallet:

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Money transmitters began operating in the 19th century, with the telegram used to move money from sender to recipient. The Journal of the Telegraph 2(20), p.248 (1867) reports that:

One of the English telegraph companies has been in the habit, for many years, of transmitting money in amounts of any size, by the employment of a cypher or key which has never yet failed (my emphasis), and by which a large revenue has been derived.

Given that in the early 1860s the messaging business in England was mostly generated by business and institutional users (as the general public had yet fully to understand, let alone domesticate, telegraphy) this means that the encrypted money transmission services referred to in the Journal must have been a commercial service before 1865,  soon after the deployment of telegraphy technology beyond its orignal base in the railways.

This use of a “cypher” to send money is not surprising. The use of telegraphy created an almost immediate demand for encryption and not only financial services. However, most European countries forbade the use of codes by anyone other than governments. Twenty states founded the International Telegraph Union (ITU) in 1865, drawing up a set of rules under which the ban on the use of codes was lifted. (The United Kingdom did not join until 1871.)

Telegraphy users then became increasingly innovative with their codes (using meaningless long words to mean specific things) until the ITU imposed a limit of ten letters per word and ruled that code words had to be genuine words in the language concerned. As is generally the case in such matters, all attempts to restrict the use of codes was defeated by clever code makers. What’s more, since the code books were a source of insecurity, the procedures were not secure and depended on a high level of trust between counterparties.

This struggle between authority and cryptography reminds me of a similar tale in a different context. The “Cod Wars” between Britian and Iceland (see Mark Kurlansky’s splendid “Cod: Biography of the fish that changed the world“ for the full story). The Anglo-Danish Convention of 1901 gave the British permission to fish up to three miles from the coast of Iceland, a state of affairs that the volcanic colony was most unhappy about. By the late 1920s, the Icelandic Coast Guard had started to arrest British (and German) trawlers found within what it saw as its territorial waters. However, the British trawlers got smart and got harder to catch because from 1928, they were equipped with radio and started passing coded messages between themselves to alert each other when Coast Guard vessels were in and out of harbour. “Grandmother is well” meant that the Coast Guard were in port, for example. The Icelandic authorities therefore made it illegal send coded wireless messages. This had no impact whatsoever, of course: British seafood companies simply devised new code systems for the trawlers to use. Think about it: how on Earth would an Icelandic wireless operator know whether “Tottenham Hotspur are the pride of North London” was a coded message or gibberish?

 But back to the telegraph. It is a testament to British fintech that the Journal report above dates from some years before Western Union’s introduction of the first commercial money transfer service in 1871 whereby Americans could pay money to a telegraph office, and the operator would transmit a message to “wire” funds to another office. The intended recipient could pick up the transfer at the destination by using a password to release the funds. Western Union also introduced “private” code books containing words and special passwords that were used consecutively and were only known to selected telegraphers so that they were able to offer a secure service.

I mention this slice of history to make the point the new communications technology inevitably creates a demand for money transmission and a need for new governance and new institutions. After the arrival of the telegraph, money transmission took on several forms. For example, informal financial institutions grew out of local businesses, such as grocery stores and butcher shops, to facilitate ticket sales for immigrants entering the United States via steamship. These institutions, informally referred to as “immigrant banks” in the early 20th century, acted as agents for families, providing access to financial services and helping them to arrange travel from Europe.

Today, most people own a smartphone, and money transmission is as simple as downloading an app and clicking a few buttons. Many Americans use their phones to store money on digital wallets and use apps to send and receive money from family and friends. Many fintech businesses are already registered as money transmitters. Cryptocurrencies and digital currencies are part of consumers’ payment options, and policymakers are increasingly grappling with their interaction in the market for payments and real currency.

UK banking insiders have warned that losses from fraud on the Facebook Marketplace are now so frequent that bank call centres are dealing with more cases of this than any other type of purchase scam.

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A new currency would be better for an independent Scotland than an informal currency union with the UK, according to a new report on developments in central banking by the Centre on Constitutional Change.

From New currency best option for Scotland, says report by expert on political economy | Centre on Constitutional Change.

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Patrizia Flammini runs a cafe in the centre of Rome. According to the Financial Times, her heart sinks when a customer pays for a coffee with a payment card (as I always do, everywhere, all the time). Why? She says that the cost of accepting cards is so high that the bank earns more on a cup of coffee than she does.

When I read this, I naturally thought to myself “so what?” and “if she doesn’t like cards, she shouldn’t take them” because as far as I am concerned, retailers should be able to take whatever they want in payments. If they want to take cash or cowrie shells, cards or chocolate (cocoa was a currency in South America for hundreds of years) then it should be up to them.

In some illiberal places, however, that is not true. In some places shopkeepers are forced to accept certain payment instruments. In El Salvador, for example, retailers are forced to accept Bitcoin. In New York, retailers are forced to accept cash. In Italy, retailers are forced to accept cards.  

What? Yes. Cash payments are not banned, but Italian retailers have to electronic transactions or face a fine of €30 and 4% of the transaction value. This law was introduced as as part of Italy’s post-Covid national recovery plan as an attempt to reduce tax evasion. The retailer can choose which electronic means they accept: They do not have to accept bank cards, they could accept payments apps or digital wallets or whatever. But they must accept at least one electronic payment option and for almost all of them, that means cards.

Shopkeepers such as Patrizia may soon have the option to refuse cards for cups of coffee and suchlike though. The new prime minister, Ms. Giorgia Meloni, wants to give them the right to refuse electronic payments for transactions under €60 while simultaneously raising the limit for legal cash transactions from €1,000 to €5,000.

(I was interested to see the the president of the Lego Nord, the economist Claudio Borghi Aquilini, defend the use of raising of the limit for cash transactions to €5,000  using what seemed to me to be the remarkably Italian argument that if he wants to buy a necklace for his mistress “what can I do with the limit of one thousand euros? I take the car, go to Lugano and pay cash”.)

Why would the Italian government want to increase the use of cash? The answer, as with so many aspects of banking, payments and financial services in general is politics, not economics. Ms. Meloni says that “cash must be king” and told the Italian parliament that “the only legal currency in Italy and Europe is the paper notes issued by the European Central Bank” and that electronic money is not legal tender (which is true everywhere but, as we all know, does not matter) and it is a form of private money.

Indeed it is. But so what? Well, Ms. Meloni’s policy is aimed at her small businesses supporters who object to the commissions on card payments, agree with her that merchant services charges are an “illegitimate present to the banks and financial firms that sell these services” and, I don’t doubt, agree with her view that financiers in general and George Soros in particular are the shadow puppet masters of the deep state and manipulate the political system to enrich themselves.

(Frankly, whenever I see that kind of focus on of Soros, I naturally hear the antisemitism alarm bells ringing, but that’s another issue.)

Lorenzo Codogno, a financial analyst (and former official at the Italian treasury) reinforced my suspicion about the underlying reason for the dash to cash, saying that “I suspect this is also linked to pressure from retailers who prefer cash because it gives them the flexibility to avoid tax”, a view supported by political consultant Wolfango Piccoli, who said that the new right-wing government is listening to “groups like taxi drivers, who you can never ignore in Italy — this is a good budget for tax dodgers”. There is good evidence to support this view. Six years ago electronic payments became mandatory in the hotel and catering industry. As a result, declared revenues from those businesses rose considerably, along with their tax contributions.

This why, as you might imagine, the plan has seen some pushback from the central bank precisely because of concerns about the  black economy and the scale of tax evasion in the country. Italians evade around €100 billion in tax every year, which is around double the rate of tax evasion in  northern Europe. For comparison, in Britain the “tax gap” is more than £30 billion and around half of this is down to sole traders and small businesses not declaring cash income.

The APPian way

Nevertheless, Italian merchants have a point. They need alternatives. But what should that alternative be? Mr. Piccoli observes “Europe is well aware that Amex, Mastercard and Visa are all American. It doesn’t have a credit card company and that’s a problem”. But that isn’t the problem. The problem isn’t that Europe doesn’t have a credit card company. The problem is that Europe doesn’t have an alternative to cards, which is why “Le Third Scheme” should be based on the things that Europe does have: Open banking, instant credit transfer, smartphones and payment institutions. I was pleased to see that the European Payment Initiative (EPI) has abandoned its plans for a card scheme (which I was always against) and decided to focus on developing such a solution, an account-to-account instant payment solution for all kinds of use cases, all through a wallet.

(There is an interesting connection here with the European moves to develop a common digital identity service and euro-wallet infrastructure.)

This is the way for retailers to change the cost-benefit equation around retail payments. Moving to in-app payments in the context of a better customer experience that delivers more data at lower cost. This is one of the reasons why I found the recent announcement from Sainsbury’s, one the U.K.’s largest retailers, they are going to use Checkout.com to revitalise their SmartShop app. The new functionality will allow customers to pay for their shopping without having to visit a point-of-sale at all. They will instead pay using the app on their smartphones.

This is not a purely European trend, of course, since some U.S. retailers have already been encouraging shoppers to try various forms of “pay by bank” options as alternatives to payment cards (by, for example, using Plaid to link the retailers to customer’s bank account) and many observers expect to see a significant increase in the use of such options in the coming year. McKinsey report U.S. growth rates for instant payments of more than 60% (admittedly from a small base) and suggest that “there remains room for a breakthrough that sparks an even higher U.S. growth rate”. That might be sooner rather than later, because I am pretty sure that the impact of FedNow, the U.S. instant payment network which is due to be launched next year, is underestimated in the retail context. As noted by The Economist amongst others, retailers have every reason to switch from paying card issuers to provide incentive to the card issuers’ customers and instead routing transactions account to account and providing incentives to their own customers.

(I rather agree with Andrew Marshman at FIS who suggests that an open, industry-wide overlay service with interoperable standards could be the way forward.)

Rita Camporeale, Head of Payments Systems at the Italian Banking Association (ABI), said last year that the pandemic had accelerated the embrace of instant payments in the country and pointed to new use cases emerging among SMEs hoping to improve their cash management practices, initially using the service to move money between their own accounts. As more and more business connect to instant payments, the pressure to use them in retail environments will surely grow.

There is another factor, though, that might accelerate adoption and satisfy the concerns of key Italian stakeholders, and that is privacy. As Diederik Bruggink and 
Alessia Benevelli from the European Savings and Retail Banking Group wrote in their interesting paper on Instant payments and cards: Apples and oranges or a possible substitute? in the Journal of Payments Strategy and Systems 15(4): p.398-409, one of the key enablers for a flourishing instant payments sector might be privacy. Using account-to-account payments via wallets, where the transaction details are conditionally anonymous, might address European sensibilities around privacy and data protection and meet the concerns of customers who prefer to keep certain transaction details confidential.

In the future, Patrizia’s QR code might trigger her customers’ smartphone wallets to then push the money directly from their bank accounts to hers while keeping their personally-identifiable information safely locked up in the bank vault. Who knows, perhaps in a few years’ time the customer’s wallet might send central bank digital currency across the internet to her wallet, leaving banking networks out of the loop altogether.