Commentary

Google's Wallapalooza 2.0

Just in time for the 22nd anniversary of the Jane’s Addiction farewell tour, otherwise known as Lollapalooza, Google made news with some pretty big changes to its digital wallet. Here’s our take on how Google may have just made its way thru the mosh pit to find itself on stage at the payment’s industry ongoing celebration of digital wallets that we have now dubbed Wallapalooza.

The real news is that Google has taken its first step towards deploying a cloud-based wallet. That’s not what it is saying, but that is the news. Its new wallet now works just like PayPal and iTunes. Google is taking on the role of merchant - just like PayPal or iTunes does when purchases are made with its wallet and now accepts whatever cards its consumers want to use (well, except American Express for now.)

It is able to do this because Google Wallet 2.0 has minimized the importance of the secure element on the handset. Yes, it still relies on NFC technology (which still really limits its acceptance - more on that later) but is using a different technology solution to basically sidestep the need to store real account information on it. The real bonus here is that issuers don’t have to mess around with having to connect to the secure element (which costs time and takes money to do) which, in turn, gives the wallet the flexibility now to accept and enable whatever card accounts consumers want to put there. Google is deploying a virtual account number tied to a MasterCard Prepaid Card, which is the only number that the secure element captures and passes to the merchant for authorization. Real account information is kept in the cloud at Google.

Using technology to solve this problem instead of hand-to-hand sales to issuers was a pretty clever move - and happens to be a pretty big deal. It, in theory, makes it a whole lot easier (and faster) for Google to get consumers. The old Google Wallet only accepted Citi MasterCard (since it had done the messing around to connect to the secure element) and unless you had one, wanted one and could get one, you were sunk.

On the downside, the Google Wallet is all still just NFC - which limits its use in physical environments to the miniscule fraction of merchants in the US that have NFC terminals and the even more miniscule fraction of people running around with Sprint handsets. Getting merchants in the US to install NFC is sort of like getting fans to turn out to Lollapalooza in 1997 when it was gasping for air - not enough meat and too expensive. But, one has to believe that this is a toe in the water for Google to deploy a more cloud-based approach to its digital wallet strategy or at least hedge its bets a bit.

The other downside, of course, is lack of consumers. Google needs a compelling reason for consumers to want to populate a Google wallet in the first place. PayPal had eBay, Apple had digital goods in the iTunes store. Google has a whole lot of Android users plus a zillion consumer email addresses thanks to Gmail, but nothing, at least so far, that provides any real call to action from a commerce perspective to ignite a digital wallet, at least not that we’ve seen. Given the lack of NFC acceptance and the limitations on handsets that enable its wallet at the physical point of sale, it will need something pretty big to get consumers interested. (And, I don’t think it will be Google Shopping - at least not now.)

The business model is a bit of a puzzle for a couple of reasons. Looking at the pure transaction economics of what it is doing, it seems a bit upside down. Since Google is using a virtual prepaid MasterCard to pass account information, it is being paid prepaid rates but paying blended credit/debit rates. Whoops. Depending on the merchant, this could be a real money loser for them. Unless of course, they pull a PayPal at some point in time and switch people to ACH. To do that it needs consumers and accounts - it has neither (or not much of either) now and a really good way to manage risk.

But, everyone knows that Google is in the data business, and transaction data is the biggest data gold mine of all. It’s also why merchants and issuers have been squeamish about working with them. Merchant acceptance is going to still be the long pole in the tent for Google - as it is with any new payment scheme. In the past, Google has always been willing to give up transaction fees for data - remember the days of Google Checkout and no processing fees? My guess is that Google will create some sort of scheme that will resemble the “no interchange” model that LevelUp has made famous recently in favor of some sort of offers-driven schemes intended to drive traffic to merchants. These offers could be enriched by all of the ooey, gooey data that Google will now have access to and can now mash up with the many other data assets it has. The potential big deal here for merchants and consumers is that Google has lots of other data sources that it can tap into to create really targeted (and potentially compelling) offers that go well beyond what people have bought before or where they happen to be at any moment in time.

Net net - a good move for the Google that puts them in the digital wallet game in a more serious way, albeit in my view at the very beginning of the march towards digital wallet relevance. The key here for them (and everyone) is ignition and Google’s plans in that regard. Its obstacles remain huge - NFC, few merchants, and even fewer consumers - but arguably some assets to leverage and develop into a compelling business proposition for both sides.

Those who are probably pretty bummed about the Google news and how the digital wallet space is developing is Isis, who is still tethered to NFC, the secure element and the hand-to-hand struggle of getting issuers and merchants on board. We’re still waiting for that to launch - July is over and no definite word on when we’ll see it in market live. The other sad face here is probably First Data who thought that building a business around the secure element was going to be big, big, big and secure (no pun intended). This move by Google underscores that making the value chain in payments bigger and more complicated than it already is just motivates people to innovate around it.

So with its latest move, Wallapalooza 2012 has now added Google to the rock star lineup that today includes PayPal and Apple as the headliners. How V.me, MasterCard PayPass, American Express and Discover are billed when the tour makes its way across country over the next several months will be worth standing in line to watch.

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About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.

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