Payment, Checkout, Blockchain, and Metaverse
This is Part 7 of What is Metaverse – the ultimate guide to understanding it all, which focuses on the role of payments in the Metaverse. Here, payments are defined as “the support of digital payment processes, platforms and operations, which includes on-ramps in fiat currency (a form of digital currency exchange) to digital currencies and services pure financials, including cryptocurrencies, like bitcoin and ether, and other blockchain technologies.
Throughout this primer, the Metaverse has been positioned both as a successor state to the mobile internet, and as a platform for leisure, work, and general human existence. The success of this vision depends on the prosperity of the economy of the Metaverse. And we know what makes an economy prosperous: competition and a constant cycle of disruption/displacement, a large number of profitable businesses (especially small and medium-sized businesses), mobility of capital, high consumption.
In Part 6, I discussed some of the technologies that help achieve these results. However, I have omitted one of the most important exchange tools and standards: payment tunnels and services. These technologies enable and manage the flow of money through the economy and define the “cost base of doing business” for every business, worker and consumer in that economy. And they have already become a problematic battleground for hegemony in the nascent Metaverse.
To explain how, I’ll start with an introduction to payments. Then I’ll discuss their role in controlling virtual worlds, how the policies of these individual worlds are sub-optimal for the economy of a Metaverse, and finally why many members of the Metaverse community are optimistic about blockchains/cryptocurrencies .
The main payment tunnels
Over the last century, the number of payment tunnels has diversified due to new communication technologies, the increase in the number of transactions carried out per person per day, and the fact that the majority of purchases are not made not in physical cash. Between 2010 and 2020, for example, the share of cash in US transactions fell from over 40% to less than 25% (the post-COVID norm is expected to be much lower).
The most common payment tunnels in the United States are ACH (“Automated Clearing House”), Fedwire, CHIP (“Clearing House Interbank Payment System”), credit cards, PayPal and peer-to-peer payment services like Venmo. These tunnels have different requirements, merits and disadvantages.
Transfers can only be used between (and therefore by) banks, are only available on non-holiday weekdays and during office hours, transactions are not reversible, cannot be used to request funds (and therefore doesn’t work for credit card payments, bills, etc.), and high shipping costs (eg Chase pays <$0.15 per transfer, but charges $25-45 per outgoing transfer), receiving fees ($15 to receive), and additional fees for non-USD denominated transfers, failed transfers, confirmations, etc. These fees make transferring small amounts particularly inconvenient, but are inexpensive for large transactions (e.g., individuals can transfer up to $100,000). CHIPS, which is only available to 47 member banks, is the cheapest transfer service, and therefore the default choice for banks. However, the funds are not available to the recipient until the following day. Fedwire settles in real time but is more expensive. Both solutions require a bank account. International transfers usually take two to three days.
The ACH system is cheaper than wire transfers; most banks allow their customers to make ACH transfers for 0 or, at most, 5 dollars and activate automatic payment of ACH bills for free. In most cases, businesses can make ACH payments to their vendors or employees for less than 1% per transaction. Unlike transfers, ACH is reversible and can be used to credit or debit accounts (hence the automatic payment of your mobile phone bills). However, ACH is much slower than wire transfer – from one to three days. This is because ACH payments are not “cleared” until the end of the day, when a bank consolidates everything it needs to send to another bank