Google Has a Card up its Sleeve

Despite generating impressive buzz with its Wallet offering, Google’s foray into the world of payments has so far proved disappointing.  As Google prepares to unveil an overhauled version 2.0 of Wallet, now would seem an appropriate opportunity to autopsy Wallet’s original platform, take measure of its shortcomings, and scrutinize Google’s new direction.

Google Wallet Version 1.0
May 2011 – July 2012

Google’s original wallet relied exclusively on NFC to enable payment.  To pay, a Wallet user entered a pin, selected a card account from among those stored within the secure element of his phone’s NFC chip, then waved his phone across a compatible contactless reader.  Once a user’s payment credentials had been successfully transmitted, payment was processed in manner identical to the way in which ordinary electronic card transactions are processed.

Wallet 1.0 was not a success.  Its proponents seemed convinced NFC contactless technology needed only a gentle push to bring the format to mass commercial adoption. Google seeded its platform with one major card issuer, Citi, and forged a partnership with MasterCard to access its PayPass contactless terminals.  Then it was off to the races; and an unspectacular race it was.  Wallet 1.0 was crippled out of the gate by its extremely limited accessibility.  Few merchants possessed contactless terminals, fewer handsets were Wallet compatible, all of the mobile carriers with the exception of Sprint banned Wallet from their mobile networks, and just one major card line – Citi MasterCard – could be added to Wallet.  Unsurprisingly, Wallet was not a hit with consumers.

Google Wallet Version 1.5: Move to the Cloud
August 2012 – Present

Its experience with Wallet 1.0 taught Google that it could not count on decades of entrenched consumer habit and payment infrastructure to evolve overnight.  Mobile commerce holds great promise to unlock new value to stakeholders on all ends of the payment equation – but in its enthusiasm for this great opportunity, it would seem Google initially overlooked what has made card payment so successful – it simply works.  When it comes to how we pay, this is what we care about most: certainty that we will be able to pay in the manner of our choosing at the locations of our choosing.

Wallet 1.0 fell far short of this mark.  The platform supported a mere handful of card brands and was incompatible with readers at most merchant locations.  With its major summer update, dubbed Wallet 1.5, Google set out to address the first  of these problems – lack of card support.  A wallet that holds one Citi card isn’t much of a wallet, after all!

Few card issuers had expressed interest in undertaking the significant investment necessary to achieve NFC integration with Wallet 1.0 – particularly given Wallet’s limited consumer reach.  So, with Wallet 1.5, Google introduced a clever workaround.  Google began offering Wallet users the option of storing any and all payment cards supported by a major card network (i.e. Visa, MasterCard, Amex, Discover) on Google’s cloud.  When it comes time to pay, a user indicates which account they would like to charge and physically authorizes the transaction via a virtual NFC MasterCard.  The virtual MasterCard transaction does not directly charge the Wallet user for purchase.  Rather, Google’s issuing bank partner, Bancorp Bank, is responsible for directing Google funds to the merchant to cover the purchase.  Google, in turn, charges the wallet user’s card account separately in a card-not-present environment, recouping their losses on the original transaction.

Google’s pivot to the cloud was a big improvement.  Google announced in mid-September that use of its wallet had doubled within just six weeks of the launch of Wallet 1.5 (NFC, Cloud based)   impressive results, though considerably less so when one considers the insignificant mobile user base Google had built with Wallet 1.0.  Though a major improvement over Wallet 1.0,  Wallet 1.5 remains  unusable at most merchant locations and inaccessible to all but a sliver of the mobile-enabled consumer marketplace.   Consequently, Wallet 1.5 has made little additional headway with mainstream consumers.

Despite its early struggles, Google remains undeterred. Its recent announcement of a forthcoming, additional major Wallet update indicates Google is working full bore to work out these kinks and introduce a viable mobile wallet.

Google Wallet Version 2.0 : Google has a Card up it’s Sleeve!
November, 2012  – ???? 

Have you heard about Google Card?  If not, expect to soon. For those of you under the impression that Google Wallet is all about NFC, think again.  Recently leaked images confirm longstanding rumors that Google plans to incorporate a physical card into its Wallet platform with the release of its much anticipated product update, Wallet “2.0.”

Wallet 2.0 builds upon Wallet 1.5’s cloud based architecture.  Users of Wallet 2.0 will load and select card accounts just as they had with Wallet 1.5.  However, when it comes time to make a payment, Wallet users will soon have the option of swiping a Google branded card rather than waving NFC enabled phone.

Google’s new card offering is rumored to be a white labeled Discover card.   This would mean all Wallet transactions authorized using Google’s new card would be processed over the Discover Network, expanding Wallet’s reach to the 90% of US merchant locations that currently accept Discover.  This figure represents a major improvement over the ~10% of US merchant locations that accept contactless NFC payment, Wallet’s traditional bread and butter.

The following are two possible ways in which Google’s Wallet 2.0 back-end could be structured:

By stepping away from NFC with Wallet 2.0, Google hopes not only expand Wallet’s accessibility at merchant locations, but also to gain access to consumers across a wider spectrum of mobile devices and carrier networks.  Against Google’s initial expectations, the mobile industry failed to readily adopt the NFC standard, reducing Wallet’s reach to just a handful of handset models.  Moreover, since Wallet’s mid-2011 launch, three of the largest carriers, AT&T, Verizon and T-Mobile, have notoriously blocked Wallet from of mobiles devices operating over their networks, citing security concerns related to Wallet’s use of the secure element of NFC chips in carriers’ phones.  While it is widely believed that the carriers harbor an ulterior motive for blocking Wallet – an interest in securing a competitive advantage for Isis, the long delayed, carrier backed mobile payment service –  Google’s reliance on carrier’s NFC chips has given them the justification they needed to deny their customers access to Wallet.

Wallet 2.0 will achieve cross-compatibility with the many mobile phone models that do not support NFC.  It is rumored Google has already begun running Wallet trials for iPhone. Further, Google hopes that Carriers will give their blessing to Wallet 2.0, which does not require access to the secure internal hardware of mobile phones.

For now, it appears Google prefers to build intrigue along the sidelines rather than make official announcements.

Challenges for Google Wallet

Google can anticipate significant gains in Wallet’s user base as it continues to improve the accessibility of it mobile payment platform with the release of Wallet 2.0.   All the same, many serious challenges remain for Google as it attempts to attract a mainstream audience of users to its platform.   Wallet is now en route to cracking the accessibility problem that has long hindered its prospects, however the measures it has been forced take in order to create an open and accessible platform threaten to invite serious problems of their own for Google.

Consumers Drawbacks: Wallet is an Imperfect Substitute for Physical Wallets

Ultimately, Google can make no headway with Wallet if consumers do not consider Google’s platform a suitable alternative to their conventional wallets.  Google Wallet’s recent improvements in accessibility are commendable, however Google’s platform still falls well short of the versatility and convenience of a physical wallet in many respects.  Below are just a few examples:

1. Wallet offers no integration with existing loyalty and gift card schemes.  There is no way to use these cards in Wallet.  Google is developing its own loyalty system, but needs merchant support to make this a suitable alternative to existing loyalty programs.
2. Purchases made with Wallet are settled with Google, not with the merchant with whom the sale was made.  This results in complications with dispute resolution and tabulation of rewards and cash back.  Google will need the support of Card issuers and Card networks to resolve these sorts of problems.
3. Wallet cannot be used everywhere your card is accepted.  Discover has made great strides in recent years toward expanding its network of merchant coverage, but still lacks MasterCard and Visa’s universality.  Wallet will never work at the 10% of card-accepting merchant locations that do not accept Discover.  Furthermore, Google needs to convince both processors and merchants to accept the bin-ranges on Google branded cards (as discussed below, there are plenty of reasons for which these players may chose not to accept Google’s card)
4.  If your phone or internet connection dies, you cannot change the card account associated with Wallet.
5. Count on fees if you attempt to withdraw cash from an ATM using Wallet’s physical card.
6. Loss of privacy.  Google wants your data.

Many of these issues can be resolved with the help and support of additional stakeholders across the payment ecosystem (e.g. merchants, issuers, networks, processors).  Unfortunately for Google, there is little reason to expect industry participants will welcome Wallet with open arms.

Concerns of Merchants: a Threat to Data and the Bottom Line

Merchants tend to be extremely protective of their customer data, which they view as an important competitive advantage. Merchants tend to view companies like Google as barbarians at the gate, intent on break their way into this industry to get their hands on treasured customer data. Google will have a very hard time dissuading merchants of these fears. After all, Google’s is a business run on big data, and its interest in breaking into payments  is abundantly clear. Google knows what we search for, what ads we view/click, how we navigate the web, and increasingly how we navigate our daily lives. And yet, Google knows next to nothing about what we purchase offline.   This data is extremely valuable; despite the rapid growth of e-commerce, 94% of purchases still take place in-store. By gaining access to this information, Google effectively closes the lead generation loop – enabling major new sources of revenue.  Of course, to do all of this, Google needs to collect “basket level” purchase data (itemized purchase history), and simply cannot do so without close merchant involvement in its wallet programs.  Merchants just aren’t interested.

Merchants are also concerned that new payment entrants (e.g. Google, Isis, PayPal) may influence their costs to accept payment. Merchants, who often pay two to three times what they earn in profit simply to accept payment, have fought tooth and nail over the past two decade to secure a better deal on card acceptance vis-à-vis the payment networks. Google professes that it is not interested in adding new layers of fees and hidden costs to generate incremental revenue. Merchants, however, remember all too well the way in which Visa and MasterCard lured them onto their networks in the early 80’s with easy terms, only to ramp up fees as soon consumers had grown dependent upon their cards. They are not interested in repeating this mistake.

Concerns of the Card Networks and Issuers: Fear of Disintermediation

Card networks and issuers should also be skeptical about supporting third party mobile Wallets such as Google Wallet. Card issuer’s most immediate concern is that these platforms could interfere with their pre-existing relationships with cardholders, potentially undermining historically important concepts such as top-of-wallet. For, Wallet gives Google a powerful means by which to directly influence consumer financing decisions, weakening the influence of issuers on such decisions.  Making matters worse, Google likely has strong incentives to encourage Wallet users to pay with cards that generate less revenue for issuers (e.g. debit and prepaid).

“All of these wallets (Virtual, NFC, Cloud, …) are causing issuers to wonder ‘who is top of wallet?’.. and how does a customer select my plastic. They seem much more concerned about one physical plastic card wrapping them than a virtual wallet, but they are also very concerned about data and letting any ONE intermediary see transaction data (and add offers/services on top of them). In other words “DON’T WRAP ME” … the established players want to stop anything before it starts.” http://tomnoyes.wordpress.com/2012/10/25/dont-wrap-me/                                          

For their part, the card networks worry virtual Wallet platforms like Google Wallet could undermine their reach with merchants.  For example,  if consumers stop paying with with their physical Visa cards and instead begin charging their Visa accounts virtually with Wallet, merchants never see Visa (rather, the card registers as a Discover card), and may eventually stop accepting Visa. A card networks ability to compel banks to issue their cards derives from their expansive networks of acceptance points, and so the networks are very defensive when it comes to protecting their merchant relationships.

Longer term, issuers and particularly networks have reason to fear that a company such as Google, if wildly successful, could potentially attempt to cut them out of the payments equation altogether.

In light of these concerns, it is perhaps no surprise that Amex initially refused to support Google’s cloud based Wallet.  More recently, rumors have begun circulating that Visa issued Google a cease and desist regarding certain elements of its cloud-based approach to payment.  It seems safe to conclude Wallet is likely to face significant resistance from Networks and issuers as it attempts to expand its reach among consumers.

Conclusion

For the time being, mobile payment is still viewed by the average consumers as a solution in search of a problem. While the ability wave a phone rather than swipe a card is undeniably cool, contactless payment in itself ultimately provides little added value beyond a bit of fleeting novelty. To gain any sustainable traction with consumers, Wallet developers must offer a payment that is solution superior to the physical wallet. This requires a base platform that is as versatile as it is powerful– one that offers all of the advantages of the conventional wallet with fewer of its drawbacks and powerful added features. Until the conventional Wallet has been matched, it is a pipedream to believe it can be exceeded.

Google has come a long way since it broke ground in 2011 with the release of Wallet 1.0, the first mobile payment platform commercially available in the United States. Like so many before it, Google learned the hard way that the US payments industry poorly accommodates rapid disruption. Unlike its predecessors, Google is, well, Google. With $15 billion in the bank, it can afford to miss the mark, learn from its mistakes, and live to fight another day. And so it has.

Indeed, Wallet is on the right track with Wallet 2.0, but still has a long way to go. We at Protean would like to point the way forward:

Protean Payment Platform 1.0
Spring, 2012  –  ????

Peter Hazlehurst, global head of payments, product management at Google recent remarked,

“Fundamentally, we’re doing this because we think it’s great for the user, and the reason we’re in the middle of the transaction is because there is no other way to do it technically,”

Technically, this statement is incorrect.  There is a way to unlock the power and convenience of the mobile wallet without inserting a middleman into the picture.  We at Protean are charting precisely that course.  Like Google, we have sought to bridge the mobile wallet to the existing payment infrastructure by pairing it with a physical card. Unlike Google, our solution introduces no unneeded frictions or complications into the transaction process. Our powered card, Echo, mimics ALL of your other cards and syncs directly with our mobile wallet app via Bluetooth. When you swipe Echo, you are essentially still swiping your ordinary cards.  With Echo, your phone becomes your wallet, and you can continue paying just as you always have.