Kevin Gosschalk, Founder and CEO, Arkose Labs shared his insight with Payment Expert on the growing importance of the banking sector embracing the growth of the metaverse.
PE: How important is it that banks own a footprint in the metaverse?
KG: A simple way to think about the metaverse is that it’s where our digital and physical lives converge in a virtual, alternative take on real life. The gaming industry is a pioneer of the metaverse, but increasing numbers of people are spending increasing amounts of time in metaverse worlds – not just socializing by playing games where people work together toward a shared goal but also going to concerts, school, exercise classes, spending time with other people, and even cycling together through various worlds. People and businesses are buying real estate and creating houses in metaverses, like Decentraland and The Sandbox. The latest figures show that the average cost of real estate in the metaverse has increased 1,200% in less than a year, with a parcel topping out at around $13,000.
If you combine the interest of consumers and the market opportunity, which sources say is in the mid-trillions of dollars, it would almost be too hard for banks, and really just about any company, to ignore.
Having a footprint in the metaverse is important for banks. Banks are already launching into the metaverse, and right now they are focusing their strategies around customer service and marketing. A consumer’s avatar can go into a branch in a metaverse world and have their questions answered by customer service reps, for example. J.P. Morgan Chase was the first bank to stake ground with a lounge, and HSBC recently announced it is moving into the metaverse too. Other banks and fintech companies will most likely follow suit soon.
The metaverse is rapidly evolving and the banks that get in early have the rare opportunity to rethink, reimagine, and reinvent what it means to be the banking industry in a virtual world, where already the currency in the metaverse is virtual, NFTs are an asset class, and real estate isn’t “real,” it’s code.
PE: Are there any risks involved with banks entering the metaverse?
KG: The risks that we can shed light on that a bank will most likely encounter in the metaverse are related to financially-motivated fraudsters. Nuances exist to the fraud risks banks will face in the metaverse – the risks aren’t exactly the same as in a physical or digital world.
We’re already working with many metaverse companies – the early pioneers and the hyper-innovators, like the blockchain gaming companies – to help them protect their consumers accounts from being duped by bad actors.
We’ve observed through our threat-intelligence gathering that it is the most sophisticated category of fraudster, the Master Fraudster, that is attacking consumers who are already active in the metaverse. The metaverse is a new world, and the first bank movers will have the chance to influence and build a new type of bank industry from scratch. As they do that, the question of how to secure it becomes a pressing issue. For example, right now a bad actor could create what looks like a real bank branch in the metaverse to conduct social engineering attacks.
The economic incentive to attack a bank is very high for fraudsters because attacks can be very lucrative. Banks are more than aware of this and know what types of attacks to expect and thus defend their consumers’ online accounts against. Banks primarily deal with account takeover attacks fueled by credential stuffing, application fraud, and a small percentage (9%) of synthetic account attacks.
Attack types tend to change in the metaverse, though. For example, an increased percentage of attacks are synthetic accounts: 30%. In addition, the volume of synthetic accounts is massive for metaverse companies – so banks will have to adapt quickly to deter volumetric attacks. Synthetic identities are extremely difficult to detect and deter, because they present like genuine consumers. Banks should develop the ability to defend against this type of attack now, so that they’ll be ready to protect their consumers’ online accounts later in the metaverse.
Fraudsters are opportunistic no matter the world: virtual, digital, or physical. Like banks, metaverse companies are attractive to fraudsters because attacks on them are profitable – these attacks yield lower dollar amounts than bank attacks, but high success rates when using volumetric bot attacks. The economics, the wealth-creation opportunities, are fantastic for fraudsters.
As banks set up shop in the metaverse, the location of their attackers change. Most attacks (89%) on banks come from North America. For metaverse companies, attacks come from all over the globe. This means banks will have to be aware of new telltales based on geography.
PE: What can banks do to mitigate the risks of fraud in the metaverse?
KG: To mitigate fraud risks in the metaverse will require new forms of identity authentication, because banks will need to link things like a consumer’s crypto wallets to the metaverse world that they are in. This reality will spark new requirements for technology like hardware identifiers. It’s also important for banks to remember the demographic that is engaging with the metaverse tends to skew younger, and that’s probably a different audience than the audience on which banks have traditionally focused.. When it comes to mitigating risks and making sure the people banks are doing business with are who they say they are, we’re going to see a strong reliance on new types of authentication and less reliance on today’s standard methods of user-generated passwords and one-time-passwords.
PE: Will banks being in the metaverse lead to a deeper embrace of digital currencies and NFTs?
KG: Possibly, but we’ll have to wait and see. What we do know is that people, especially younger generations, are growing up in a world where digital currencies and NFTs are the norm. So I don’t think those two assets are going away – they will probably just evolve as the metaverse evolves.
PE: What do you believe banks and financial institutions can do to remain appealing in the metaverse – given the space will be widely used by celebrities and global tech firms?
KG: It’s not just celebrities and global tech firms that are using the metaverse space. Everyday people are leveraging it, and the demographics tend to skew younger. So it is a great opportunity for banks to reinvent how they provide customer service to a younger generation that is more digitally savvy than any other generation in history. It’s a great time for banks to figure out how to lend money by redefining collateral for a loan – will virtual mortgages be backed by NFT assets? Can virtual mortgages be paid with virtual currency? These are some of the exciting questions that banks have the opportunity to figure out the answers to.
The U.S. Postal Service missed the opportunity to figure out and capitalize on email. If banks don’t engage in the metaverse, they risk the same fate – that virtual reality-first companies are going to innovate the virtual alternatives for mortgages, personal loans, auto loans, savings accounts, investment assets, credit cards, and other financial instruments in the metaverse.
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