Payments, Payment Rails and Blockchains and the Metaverse

 

Source: https://www.matthewball.vc/all/metaversepayments

The Metaverse was positioned throughout this primer as both a successor state for the mobile internet and a platform that allows humans to enjoy leisure, work, and exist in the larger world. A thriving economy is key to the success of this vision. And we know what makes for a thriving economy: competition and a constant cycle of disruption/displacement, a large number of profitable enterprises (especially small-to-medium businesses), capital mobility, strong consumer spending.

I have discussed the technologies that contribute to this result in Section VI. But, I neglected to mention one of the most crucial interchange tools and standards: payments rails and related services. These technologies allow and manage money flow throughout the economy. They also define the "cost of doing business", for all workers and consumers. They're already a problem battleground for hegemony within the emerging Metaverse.

Let me start by briefly introducing you to payments. Then shift into their role in controlling virtual worlds, how the policies of these individual worlds are sub-optimal for a Metaverse economy, and then why many in the Metaverse community are optimistic about blockchains/cryptocurrencies.

Major Payment Rails

The increase in transactions per person per day and new communication technologies have led to a greater number of payment rails. Additionally, most purchases are made in electronic cash. For example, the share of cash in US transactions decreased from more than 40% to less that 25% between 2010 and 2020 (the post-COVID norm will be much lower).

The most popular payment rails in America are ACH ("Automated Clearing House") and Fedwire. Each rail has its own merits and disadvantages.

Only wires can be used between (and through) banks. They are also not available during holidays and business hours. Transactions are not reversible and cannot be used for requests of funds. High sending fees (e.g. Chase charges a fee of $0.15 for each wire. However, they charge $25-45 per outgoing and receiving wires. They also charge $15 to receive. Additional fees are charged for non-USD wires, failed wires, confirmations, and other fees. Although these fees are prohibitive for small amounts, they can be used to pay for larger transactions such as e.g. Individuals can wire up $100,000.00 CHIPS is available only to 47 member banks and is therefore the default choice of banks. The funds won't be available to the recipient until next day. Fedwire is faster but more costly. Both options require a bank account. It takes two to three days for international wires to arrive.

ACH is more affordable than wires. Most banks will allow customers to make ACH transfers for as low as $0 or $5. They also offer automatic ACH bill-pay. Businesses can send ACH payments to employees or vendors for less than 1%. ACH can be used to debit or credit accounts, and reversibly unlike wires. This allows you to automatically pay your wireless bills. However, ACH takes up to three days to clear. This is because ACH payments aren't cleared until the end of the day. At that point, a bank will combine all it needs to send to another bank (i.e. All ACHs are combined and sent in one amount via Fedwire. The Fed then sends the funds to its receiving bank the next day. They must deposit the funds into the recipient's account. This can take up to a day. There are many challenges that this creates. If neither the sender nor the receiver have funds, it can take up to two and a quarter days. ACH transactions cannot be sent outside of business hours and can only be confirmed as successful transactions. This error can take several days to fix as the recipient bank may not notice the problem until the second day. The report isn’t processed until the end of the day. The original sender will then receive the notice about the failure the next day. At that point, the three-day process begins again. ACH is more secure than other mainstream payment methods and less likely to be hacked. While wires are possible to non-US banks but ACH can only be used domestically

Another important payment method is credit cards. You need to swipe a card or enter credit card information. After that, a remote server or credit card machine captures the account information and sends it digitally to the merchant's bank. The customer's credit provider then approves or denies the transaction. The process usually takes between one and three days and costs merchants 1.5-3.5% of each transaction. Customers typically pay by ACH to pay their credit cards. Credit card payments are accepted in all countries. Credit card payments can be reversed, just like wires but not unlike ACH.

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The digital payment networks, such as Square and PayPal, are also available. Individual accounts can be funded primarily via ACH or credit cards. Once funds are cleared, the platforms act as a single bank that is used by all accounts. All transfers between users of the same platform are, in effect, reassignments to money held by that platform. These platforms do not charge fees for money sent between family and friends. However, businesses often pay 1.5 to 3% transaction fees when they are paid. A user can transfer their money from the platform to their bank account by paying 1% (upto $10), or waiting two to three business days while the platform collects interest. It is not possible to transfer cash directly from one digital payment network into another. Many are US-only.

Security, fees, speed and security are the main goals of US payment rails. While no one payment rail is perfect, their technical attributes are more important than their competitors. There are many wire lines, credit card networks, and digital payment processors. Each one has its own advantages and disadvantages. Variable fees are also available within each category. Amex charges more than Visa but offers more lucrative points and perks to consumers and merchants a higher income clientele. If a user decides not to apply for a credit card or a merchant refuses to accept Amex, there are many options. If users are willing to lend money to a network for two to three consecutive days, they can make free payments.

The Fight for Control Payments in Metaverse

The virtual world should theoretically have better payment systems than the real world. After all, it primarily sells goods that are only available online. These goods can be purchased via digital transactions (and therefore low marginal costs) and cost $5-100 per item. It is also a large economy. This economy is also large. Last year, $54B was spent in virtual goods, skins, or lives, as compared to $32B in the movie box office, and $30B on recorded songs in 2019. It is also free from systemic financial risks, plays no critical role in society, has thousands of market participants, and is available on a dozen platforms. This should encourage creativity, innovation, as well as competition in payments.

In reality, however, the "rails of the virtual economy" are worse than the real world. They are more costly, slower to change, and cumbersome. They're actually based on precedents closer to the creation of CHIPs in 1970s than PayPal or the iPhone.

Namco, an arcade manufacturer, approached Nintendo in 1983 about publishing Pacman's original titles on its NES console. At the time, it was not a platform and therefore closed at that time.

Namco eventually agreed to pay Nintendo a 10% licensing payment on all its titles (which Nintendo would have approval rights for), and 20% in exchange Nintendo making Namco's game cartridges. The 30% fee became a standard industry practice, which was replicated by Sega and PlayStation.

There are many reasons console platforms can collect nearly a third post-tax revenue from game developers' work. This is despite the fact that expensive cartridges have been transformed into CDs at a fraction of the cost (which platforms no longer make for publishers) as well as lower bandwidth for digital downloads. It also applies to online microtransactions, DLC, and other digital downloads.

Consoles such as the Xbox and PlayStation are sold at a discount, which increases the number of owners and expands the market for developers. However, profits must be made from platform fees. These platforms also maintain and develop a variety of APIs and tools that developers can use to create their games. They also operate player networks like PlayStation Plus and Xbox Live, which allow for online multiplayer. These platforms have to pay the underlying payment rail, i.e. PayPal or credit cards, which cost 2-3%.

These arguments have their merits and flaws. The consoles are sold at a lower price to consumers. Developers have no choice but to pay 30% more for the same unit. These platforms refuse to support open standards, which could be used in place of their expensive ones. This forces them into additional R&D and creates extra work for developers who have to support different standards on different platforms. None of the major platforms have established centralized player networks since the 2000s. In fact, the majority of the work online (and costly) is done by the developers.

Instead, online services are used to create distance between players and developers, and to lock them into hardware-based platforms. To access online games, PlayStation Network and Xbox Live IDs are required. Users of the Xbox and PlayStation must also pay monthly fees. These platforms are also permanently locked out of player entitlements, such as trophies or game purchases. You can access Call of Duty Modern Warfare and many of its achievements via PlayStation.

What is more important than the policies of Microsoft, Sony and Nintendo's respective gaming consoles, is how their closed distribution model and 30% fee has been adopted and used by general-purpose mobile devices like Apple's iPhone or iPad. Contrary to consoles, Apple does not lose money on its hardware. It generates more that a 35% margin, and often on a higher price. While Apple's devices offer the best mobile gaming experience, it is difficult to argue that they expand the market like a PlayStation. Many iPhone users would purchase a smartphone regardless of whether Apple exists or not and whether it could play any games. It's more likely than not that people who enjoy mobile games will buy more costly iPhones and iPads from Apple to play them.

Furthermore, Apple offers a fraction of the online services of the console platforms -- there's no real player network, nor player-to-player communications service, nor accomplishments/achievements services. Apple does not maintain its APIs or APKs for gaming. Apple's App Store revenues are dominated by gaming. This is the only category that Apple charges 30% for all transactions and blocks any workarounds (e.g. You can subscribe to Netflix and Spotify through a competitor platform or via the web browser. Apple receives 0% of all revenues, even though the services are only used on its own devices. An estimated $700B was spent on iOS apps in 2020. Apple's billing policies only apply to virtual goods and services. This amount is just 10%, or $72B. This was roughly 70% or $50B of the total, which included games. (The judge in Epic Games' lawsuit against Apple said to Tim Cook: "You don’t charge Wells Fargo. Right? Or Bank of America? You're asking gamers to subsidize Wells Fargo.

It is not clear what "fair" price these platforms should charge. They make, market, maintain, and support their platforms and devices. They do face competition from other platforms. A household can buy an Android just like an iPhone or a PlayStation, but not an Xbox. In the digital/virtual age, market power is mainly based on network effects and scale. Each platform works hard to lock developers to its platforms. They force users and developers to bundle separate businesses such as drivers/APIs, software distribution, payment options, software distribution, entitlements, identities, and entitlements. The 30% fee is regardless of the products/services that a developer or user needs or values.

Platforms that bundle their services are not the only ones paying these fees, but rather an industry-wide desire for fee-based competition and policies that discourage it. Platform A may reduce its store fees by 30% to 15% but a developer can't cut their consumer-facing prices on that platform by 15% (i.e. The savings are passed to the consumer, but the developer cannot reduce their consumer-facing prices by 15% on Platform A (i.e. While a developer can leave these platforms, no one can afford to miss the main platforms. Imagine Tinder leaving iOS to get Android at one-third the fees. This would result in an increase of iOS Bumble users and possibly attrition among Android-based Tinder users. Sony makes Fortnite pay its store fees in case PlayStation users buy a large amount of V-Bucks on other platforms. Imagine a Fortnite player spending 100 hours on PlayStation and 100 on Nintendo Switch (i.e. 50/50, but only spent $40 on PlayStation and $60 on Nintendo Switch (40/60). Epic Games must pay 25% to both Sony and Nintendo for the $10 "underlapped". ( This policy may have been discontinued

Although this may sound like a complaint of market failure, there is a reason Apple is now defending monopoly claims in court and asking Microsoft to prove that Xbox hardware was sold at a loss (which it declined). The distribution model mentioned above significantly limits the growth of the Metaverse ecosystem, regardless of whether or not the digital ecosystems or smartphone are experiencing market failure.

Payments in the "real world" can cost as low as 0% and as high as 2.5%. Sometimes, they even reach 5%. For a slightly different perspective, the average annual interest rate for unsecured credit cards loans is between 14-18% and most states have usury restrictions that prohibit rates higher than 25%. Unsecured cash up to $2.5MM Virtual cash up to $2.5MM!

This system would be a disaster for the global economy. Businesses would see lower profits, which would limit their ability to invest in new products, services and offerings. Consumers would also spend less.

These problems only get worse.

Each hardware platform controls the Metaverse and blocks or disables any potential competitors. Apple controls the App Store to block iOS browsers (either Apple Safari or other browsers like Google Chrome) using WebGL. This JavaScript API allows for sophisticated browser-based 2D/3D rendering. Apple claims that this restriction is necessary for device performance as native apps are more efficient than browser-based experiences. However, developers can't make rich games without Apple's tools, which Apple charges.

Apple also prohibits third-party applications from using NFC chips to make payments. This ensures that Apple Pay is the only digital payment option that allows tap and go. Apple claims that this is to protect users' privacy, but third-party developers such as Ford and Marriott can access the Apple NFC API, which allows them to open doors. This is a much more dangerous use than $5 coffee.

Another example is cloud game streaming. This technology transforms the hardware recipient, such as a Nintendo Switch, iPhone or iPad, into a touchscreen or controller with data connections. It also skips their native APIs/drivers, and their billing system. Cloud game streaming is not supported by any major console platforms, unless they offer their own service. Apple, which does not have a cloud gaming platform and isn’t a gaming device, has blocked this technology for years. They claimed it was to protect security (as Microsoft's game streaming service could be dangerous) and privacy (as Sony cannot be trusted with voice chat or credit cards). Critics claimed that this was to disintermediate iOS from developers and gamers, as well as cut them out of billing. Apple eventually relented, but placed stringent restrictions on these apps. These rules would require Netflix, a cloud-based video streaming service, to catalog every movie and show on the App Store. Users would also have to download individual player applications to view them. These services would also have to pay Apple 30%. This is a significant amount considering that these services typically take 30%. These services are not available on the iOS App Store. They can stream to Safari browser but Apple does not allow browser-based experiences to use the iPhone's camera (there is no AR), send notifications (e.g. You can also request games, connect to Bluetooth automatically, and so on. We prefer Netflix's app to Netflix using a browser. It's also relatively simple!

These platforms will also refuse applications that are based on nudity and pornography. YouPorn and OnlyFans apps are not available on the Xbox, iPhone, or PlayStation or Nintendo Switch. As such, it is possible to imagine that AR and VR pornography/sex applications would be banned. These interactive and virtual experiences require camera access and wearable drivers. Therefore, these applications cannot be shifted to the web browser like OnlyFans and YouPorn. This is unfortunate for many reasons. One of them is that XR is designed to make sex safer.

Another problem is the restriction on player-purchased currencies. Although Fortnite is in theory a cross-play/purchase/progression title, V-Bucks purchased on PlayStation or Nintendo Switch can only be used on the PlayStation or Nintendo Switch, respectively. V-Bucks purchased on Xbox or PC cannot be used, or even seen, when playing PlayStation or Nintendo Switch. These restrictions are manageable, but they also make it difficult to spend and prevent consumers from spending. Imagine buying something from J.Crew requiring J.Crew Coins. (More on that in the next section), but also Westfield Mall J.Crew Coins. These coins could not be used or known when shopping at Mall of America J.Crew.

The most pressing issues are funding Metaverse platforms.

Roblox is full of talented creators and happy users. However, very few of these creators make money. Roblox boasts $2 billion in revenue, more than 160 million users and three billion hours of play time per month. However, only 29 developers (i.e. In 2020, three companies netted more than $1 million and three reached $10 million. This is bad. More developer revenue equals more developer investment, better products for users and more user spending.

Roblox pays developers 24.5% for every dollar they spend on their assets, games, and items. This makes it difficult for developers to increase revenue. Despite this making Apple's payout rates of 70-85% seem generous, it is actually the opposite.

The illustrative $100 in iOS Roblox revenues (which is an estimated 75-80% to all revenues) is a good example. $30 goes to Apple, $31 is spent by Roblox's safety and core infrastructure, and $11 is used by overhead. Roblox has $28 in pretax gross margin dollars that it can reinvest in its platform. This reinvestment covers three categories: user acquisition, research and development, which improves the platform for both developers and users, and developer payments. These are all key to Roblox's creation of better Roblox games. Roblox currently reinvests 23% in R&D, 7.5% in sales and marketing and 24.5% on developer payment. It currently has a margin of approximately -25%

Roblox has undoubtedly enriched the digital realm and created hundreds of thousands more digital creators. However, for every $100 it generates, it loses $25. Developers collect $24.5 in Net Revenue (i.e. Apple makes $30 in pure profit, even though it puts nothing at risk. Roblox's only chance to increase developer revenues is to either deepen its losses, or stop its R&D. This would be detrimental to both Roblox as well as its developers in the long-term.

Roblox's economy should grow with its scale. Sales and marketing should grow slower than revenue. This would only allow for a small percentage point to compensate for significant losses and marginally increase developer revenue share. R&D can also provide some margin improvements on a scale basis, but companies that are rapidly growing shouldn't be trying to achieve profitability by using R&D operating leverage. These two biggest costs represent 61% of the company's revenues and are essentially fixed. Infrastructure is a large component of the company's revenues and scales with user usage. It will get more expensive as the platform expands and enters VR. Roblox does not control store fees. That is up to the platform.

Metaverse's very concept assumes that the "next platform" will shift from hardware-based operating system and hardware-centric experiences towards persistent and ubiquitous virtual simulations. This is already happening. This is why Fortnite and Roblox are the most loved games in the world. They can run on any endpoint and have no specific hardware requirements.