Does the Future of Payments Lie in the Metaverse?

February 01, 2023 | Expertise

Adam Vissing, VP of Sales and Business Development at IXOPAY, takes a look at what the metaverse could mean for the future of payments. Looking at the potential impact on both merchants and payment providers, Adam looks to cut through the hype surrounding the metaverse following Mark Zuckerberg's announcement in 2021 and to answer the question whether the metaverse is really the promised land for merchants looking to operate in the supposed digital economy of the future.

The concept of the metaverse entered the public consciousness following Mark Zuckerberg’s announcement in 2021. With all the initial hype surrounding it, it’s easy to lose sight of reality - and not because you are wearing VR goggles. While virtual reality (VR), a computer-generated 3D reality, was at the center of Zuckerberg’s presentation, the metaverse concept itself is probably better described as a further evolution of the web. VR is just a part of that vision. Just as social media, mobile apps and cloud computing transformed the way we use the internet with Web 2.0, the same holds for the next iteration of the internet. For the purpose of this article, we will thus view “the metaverse” as platforms akin to the platforms of today, but built for the internet of tomorrow. We take a look at what this could mean for both online payments and e-commerce.

Dawn of Ages: An Open Internet

Internet platforms as we know them today are a relatively new phenomenon. The original internet, which originated with ARPANET in the 1970s, was built around web pages and the concept of net neutrality - the idea that all communications are equally important and no data should be prioritized over another.

This initially resulted in a very open internet, with a minimum of gatekeeping. While some internet providers - most notably AOL - launched their own platforms, the internet remained by and large open and accessible to anyone with a modem.

The Move to “Platform Capitalism”

This situation began to change as e-commerce took off, mobile access to the internet became more widespread and the first large social media networks established themselves as serious players, becoming first multi-million and then multi-billion companies. This era saw the birth of “platform capitalism”, a term used by Nick Srnicek in his book of the same name to describe a new business model. It is their platforms that have allowed Google, Amazon, Facebook/Meta and Uber to become such dominant players today.

Rather than approach business in a traditional way, platform companies like AirBnB or Uber adopt a very different model. Instead of buying hotels and renting out rooms themselves, AirBnB became the largest hotel site without actually owning any hotels. Uber became the largest taxi service without owning a fleet of taxis. These platforms have established themselves as go-betweens, bringing together customers and sellers via a single platform. Nick Srnicek describes platforms as “digital infrastructures that enable two or more groups to interact. They therefore position themselves as intermediaries that bring together different users: customers, advertisers, service providers, producers, suppliers, and even physical objects.”

These platforms profit by taking a slice of the pie each time a transaction is made. App stores from Google and Apple adopted a similar idea: provide a platform for developers to sell their apps to consumers for a cut of each sale, typically a 30% commission for large vendors. This is the cost of doing business on one of these stores: a 30% tax on digital goods collected by the platform owners. With Apple providing no other official means of installing software on Apple devices, their monopoly position means that selling software for iOS means accepting Apple’s terms and conditions. While Android is less of a closed system than iOS, this still largely applies to Android as well, with Google’s Play Store operating under the same model. In contrast to the first era of the internet, these platforms represent a step towards a more closed internet, with Big Tech as the gatekeeper.

Skewed Balance of Power

Closed platforms are take it or leave it propositions. Apple leverages their power to require that all payments on iOS must go through Apple. Their terms and conditions only allow sales via other platforms for a few notable exceptions (e.g. Netflix subscriptions). This issue was at the heart of the Epic Games vs Apple court case. Despite Epic Game’s Fortnite being a multiplatform game, players cannot buy v-bucks (the virtual in-game currency) on one platform and use them on another. Players must purchase v-bucks via either Google or Apple’s store for use on those platforms, giving the store owner a 30% cut each time. Epic’s attempt to bypass this 30% surcharge and pass savings on to consumers by allowing v-bucks to be purchased from the Epic games website resulted in Fortnite being removed from the app stores for violating their policies.

This illustrates the power that platforms can wield over other businesses who are reliant on the platform and how payments can be walled off. If the platforms of the future are similar closed systems - and there is every reason to believe that this is the intention - merchants will incur an extra cost of doing business in the metaverse. Payment service providers may be completely frozen out of the ecosystem in favor of in-house payment methods. While good for the platform owners, this is unlikely to be good for consumers or innovation, with no real competition to drive the market.

“In their position as an intermediary, platforms gain not only access to more data but also control and governance over the rules of the game. “ - Nick Srnicek, Platform Capitalism

Simply choosing to not do business on a platform with unfavorable terms is no longer an option for many companies. This is because social media platforms or shops like Amazon are natural monopolies. The social media site of choice is the social media site with all the users - no one wants to be on a social media platform that is not used by their friends and family. Amazon is the de facto online store for many consumers because of the breadth of its offerings. Sellers feel compelled to be listed on Amazon, which draws more consumers to the site, which makes more sellers feel compelled to be listed on Amazon in a vicious circle. Nick Srnicek calls this an essential characteristic of digital platforms; they are “reliant on ‘network effects’: the more numerous the users who use a platform, the more valuable that platform becomes for everyone else.“

Controlling the Economy of the Future

If the promises that the metaverse represents a future with a hybrid economy are true, that means that the terms of that economy will be dictated by the metaverse platforms. Choosing not to accept their terms will mean choosing not to participate in the new economy; choosing to accept the terms means being beholden to a platform whose operating principles can change overnight. 

In this light, the birth of the metaverse can be seen as the initial land grab in the power struggle for the internet of the future. Securing a position of power is undoubtedly one of the motivating factors driving the creation of the metaverse. Virtual land grabs - buying up potential competition before they become a threat - are already a feature of the current market. Big Tech firms have vast war chests of capital available to them, often as result of tax avoidance, parking cash in offshore havens and using this to fund acquisitions.

A recent example of the dynamics at work are illustrated by John Naughton in his Guardian article about Adobe’s acquisition of Figma for $20bn. He argues that the reason why Adobe was willing to pay such a large amount to acquire a relative minnow is fundamentally one of power. Figma owns the platform of the future - an online collaborative tool catering to the needs of geographically dispersed teams. As analyst Ben Thompson puts it, “Figma is set to be the ‘operating system for design’, which means that in the long run Adobe has to operate on Figma’s terms, not the other way around”. To paraphrase: if developers are reliant on Figma’s platform, Figma gets to control the terms and conditions of business on the platform, not Adobe.

This kind of thinking is not new to Meta, with obvious echoes of Facebook’s acquisition of WhatsApp. If Zuckerberg’s vision of the metaverse becomes the internet platform of the future, participating in the metaverse’s economy will mean accepting its terms and conditions or opting out of its economy altogether, with no middle ground. It is this power to dictate the terms of business that makes platform capitalism so alluring. No one knows this better than Zuckerberg. Meta is struggling with falling revenue, in part in the wake of changes to Apple’s privacy policies. These changes have affected Meta’s primary advertising model directly, leading to a first drop in advertising revenue in 2022 after years of strong growth. In fact, one of the problems faced by Meta is that it is beholden to other platforms, as it needs access to the app stores to distribute its platform. A shift from apps to a metaverse controlled by Meta would be very convenient in this regard.

This scenario raises the specter of a common risk in the IT industry: vendor lock-in. If there is a lack of viable alternative platforms, businesses cannot simply opt to conduct their business elsewhere. Much like a seller on Amazon cannot simply close their Amazon store and choose to start selling via an alternative site, businesses operating in the metaverse will face the same problem. Leaving a platform probably means leaving your customers, who are unlikely to move to a lesser platform just because a single vendor has moved. Businesses are beholden to these platforms given a lack of viable alternatives.

What Can Be Done?

Whether or not the vision of the metaverse is ultimately realized, the threat to businesses who operate on third-party platforms is real. With the balance of power having shifted significantly in favor of these gatekeepers, there is a real risk that this power becomes further entrenched by the platforms of the future.

The power of network effects means the likelihood of new players disrupting the market and disturbing the balance of power is low. As Nick Srnicek puts it, “the challenge today, however, is that capital investment is not sufficient to overturn monopolies; access to data, network effects, and path dependency place even higher hurdles in the way of overcoming a monopoly like Google. This does not mean the end of competition or of the struggle for market power, but it means a change in the form of competition.”

If the market itself is unlikely to break these monopolies, state intervention remains a possibility. Antitrust laws can be used to break up monopolies, and measures to curtail tax avoidance would eat into the large war chests that platforms have built up. This would reduce companies’ ability to acquire potential competitors before they become a threat. The EU’s new Digital Markets Act, due to come into effect in 2023, includes a ban on “gatekeepers” requiring app developers to use certain services provided by the gatekeeper, which includes payment systems. However, this still does not fully address the imbalance of power, and only affects the EU. Another avenue of attack against some platforms is in their use of “independent contractors” that help keep costs down. We are seeing some movement in these areas, but the wheels of legislature turn slowly.

Advocates for a more open internet would argue that these natural monopolies should be viewed as utilities. If they are to become so essential to everyday life - to the point of being required to work or purchase food - it is essential to keep them open and accessible to everyone. Again, this would require the legislature to get involved and would mark a return to a more open internet.

Conclusion: Risks, Advantages and a Call to Keep the Gates Open

The risk of closed platforms and lock-ins affect merchants and payment service providers in different ways. For sellers, the risk of doing business on a closed platform comes from the “platform tax”. Typically around 30%, this represents a significant increase in the cost of doing business that ultimately will be passed on to consumers. Sellers are beholden to the terms and conditions of the platform they operate on. Ranking algorithms or the types of goods that are welcome on a platform can change overnight, with huge potential impacts on businesses.

For payment service providers, there is the risk of platforms implementing their own payment gateways that must be exclusively used on the platform, undercutting PSP’s business entirely. By extension, merchants will also be affected by a lack of competition. Unable to shop around for the best deal, a single payment option results in a “take it or leave it” approach to business, with the risk that merchants cannot afford to say no. Doing so would cut off access to the merchant’s market - in some cases completely.

This approach to business is very much at odds with our philosophy at IXOPAY. We firmly believe in providing choice and encouraging openness. Our platform is designed to be agnostic, with no preference given to any individual provider. Our clients are free to work with the payment providers and methods that suit them best. Being able to switch between providers quickly is a feature, not a bug. In fact, we see IXOPAY’s ability to help customers avoid vendor lock-in as one of its advantages.

While the realization of the metaverse is still some way off and there are massive technological hurdles to overcome, the initial land grabs are already underway. As the internet undergoes another fundamental paradigm shift, businesses should be aware of the power dynamics at play. While the opportunity to conduct commerce online is crucial to most modern businesses, they should also be wary of one-sided business relationships. So while Big Tech is keen to invite us to join a metaverse that is ostensibly meant for everyone, it may be prudent to remember the old adage: beware of geeks bearing gifts.

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IXOPAY is a payments orchestration platform enabling independent, flexible and global payment processing. As a highly scalable and PCI-DSS certified “fintech enabler”, IXOPAY fulfills the needs of large merchants as well as those of “white label” clients: payment service providers (PSPs), acquirers and independent sales organizations (ISOs). The modern, easily extendable architecture offers smart transaction routing & cascading, state-of-the-art risk & fraud management, fully automated reconciliation and settlements processing, comprehensive reporting as well as plugin-based integration of acquirers, payment service providers and alternative payment methods (APMs).

IXOPAY is part of the IXOLIT Group, founded in Vienna, Austria in 2001. With local entities in Austria and the USA, IXOLIT supports national and international customers across various industry verticals. The owner-led and -financed company has grown from 2 to more than 80 employees and is focused on building innovative solutions for eCommerce.

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