Who Will Run “Android Pay?”

While the world’s now focused on Apple Pay, there’s another “A” player that’s just as capable of shaking things up in mobile payments. Android. Except that there’s just one problem, well actually there are five, that are getting in the way of making it the challenger to Apple Pay that it could be. MPD CEO Karen Webster fills you in on what they are and then offers up some thoughts on just who might be in line to become Android Pay.

Since the announcement of Apple Pay was made on 9/9, we’ve seen the big Apple Pay bank allies send food trucks to serve the Apple “fanbois” waiting in line to buy their new iPhone 6’s, participating issuers send emails to their customers proudly reminding them that they will support Apple Pay when it’s available, and acquirers establish innovation labs to grab the bandwidth of the developers who will use the Apple Pay SDK to embed payments into a zillion new apps.

It’s a stunning testament to the power of the Apple brand, really, that it’s managed to get the often recalcitrant payments ecosystem to move with such speed (and to make such financial concessions in the process) to enable a product that won’t be available for another month, will be available only to the fraction of the estimated 25 million customers who buy the iPhone 6 in the next year.

But one of the conversations that hasn’t yet revved up, but certainly will in the coming weeks and months, is how the other “A” player in this ecosystem might react in response to Apple Pay. No, I’m not talking about Amazon or even Alibaba. I’m talking about Android, the operating system for the rest of the mobile ecosystem.

I’ve written a lot over the years about the impact that Apple would have on mobile payments, once it entered, given the demographics of its users and the spending power that they have. It’s no secret that Apple users are more affluent and better educated than Android users are – here’s a Pew chart that breaks down smartphone ownership in the U.S. by age, income and education that makes that point pretty clear.

By our own back of the envelope calculations, Apple users control nearly two-thirds of the spending power in the U.S. despite the fact that it has only a 42 percent share of the smartphone market here. And that’s precisely why merchants and issuers and networks are all so eager to lock up those consumers and are willing to subsidize their breakfast, lunch and dinner while they wait in lines to buy their new $600 iPhones (and who knows what is yet to come once Apple Pay is live). I wrote some time ago that once Apple entered the mobile payments market, it could become the American Express of payments for that very reason. Time will tell whether that is, in fact, how Apple Pay evolves.

But for the moment, let’s just say that Apple Pay does become the American Express of mobile payments. Where does that leave Android?

That story is a bit more complicated for five reasons.

Reason number one is because Android was designed to let a thousand hardware makers and multi-million mobile apps bloom by creating an operating system that hardware makers and developers could access quickly and cheaply. Android was originally developed by four guys (Andy Rubin, Rich Miner, Nick Sears and Chris White) in October 2003. The original idea was to create a fancy schmancy operating system for digital cameras. The team quickly shifted focus after figuring out there was much more of an impact to be made with an open source OS for the then nascent smartphone market.

Reason number two is that as an open source platform, no one really “owns” Android. Yes, Google comes close but not in the way that Apple owns the iPhone. That means that hardware makers and developers are free to access and use it as they wish via an open source license that they get from Google. Google acquired Android, Inc. (the company the original team of four created) in 2005 and two years later launched it, along with a consortia of hardware, software and telco companies, to advance the notion of open standards for mobile devices. Updates to the operating system are released periodically. Each major release is named after something sweet: Cupcake, Donut, Gingerbread, Jelly Bean, and the latest, Kit Kat. A new release (with the letter “L” – Lollipop maybe???) has been announced and is expected to be available soon. Personally, I’d prefer cannoli.


Android’s certainly lived up to its initial premise of popularizing an operating system that’s cheap and easy to access by handset makers and developers. According to IDC, as of Q2 2014, Android powers 85 percent of the smartphone market worldwide, a quarter that set a new record for smartphone shipments globally at 300 million units. It’s the operating system of choice in phones that are sub-$200 and even those that are sub- $100 because it is so readily available. In fact, IDC reports that Android’s gains last quarter were attributed to growth in those two segments alone.

However, that very openness is Android’s greatest Achilles Heel.

Reason number three is the massive fragmentation problem that Android has. OpenSignal produces an annual report showing the fragmentation of the various mobile ecosystems. Its 2014 report shows that 92 percent of Apple iPhone users run the latest version of Apple’s operating system. There are a small number of devices that power that operating system – iPhones and iPads. Remember, we’re only up to iPhone SIX after seven years.

The story for Android is quite different.


OpenSignal reports that there are nearly 19 thousand different Android devices in the market. Yes, you read that correctly. And that’s more than there was in 2013. Of those device manufacturers, Samsung has the largest market share at 43 percent. Yet what’s absolutely stunning is the gap between it and the number two player, Sony. Sony has a mere 4 percent share. The rest of the market is divided among hundreds of OEMs.

But that’s only part of the story.


Those run many different versions of Android’s operating system and some of those versions have been customized by the handset maker. Only 21 percent of Android users run the most recent version of the operating system, KitKat 4.4. Most run different versions of Android’s prior OS, Jelly Bean. Even so, depending on what the handset maker has added to the open source Android operating system, applications written for one maker don’t work for another. And then developers have to worry about all of these different versions of the operations system out there and the different form factors to write to. This is a massive pain-in-the-you-know-where for developers.

That fragmentation makes it hard for developers to make a buck and that’s reason number four. Consumers buy smartphones because they want the apps. And developers want to develop apps that a lot of people can either pay to download and/or are attractive for advertisers to insert ads in. Developers know that if they start on the iOS platform, they only have to write one version of their application and when they do, their odds are far better of getting paid by users. The running joke is that Apple developers make enough to buy Range Rovers and Android developers to buy used Hondas. The iOS pond may be smaller overall, but the fish swimming in it are richer and easier to catch and you only need one boat and not a flotilla.

Now Google obviously recognizes this issue and is beginning to exert more control over Android so that developers have more of an incentive to develop apps for it and consumers have a more consistent experience when they buy devices running the Android OS.  It’s reported that Google – and not the OEMs – will control what software will power Android Wear, Android TV and Android Auto. It is also rumored that Android 5 will move more apps and APIs into Google Play and that they will all come preinstalled on all phones. Moving forward OEMs that want to use Android will have to include these standard things into the phone package and agree to certain conditions to use it.

And that feeds into reason number five. Google may be in the best and most logical position to control Android when it comes to mobile payments, but hasn’t exactly set the world on fire with its prior attempts to enter the payments ecosystem.

Google’s been left at the digital payments alter a number of times, starting way back in 2006 when it launched Google Checkout. Checkout, as all of you know, was the “PayPal killer” designed to enable payment online. It offered merchants a sweet deal – zero processing fees but had very few takers. Merchants said “thanks but no thanks” to the tradeoff between having free processing and the idea that their customer and transaction data would be used as currency to monetize their ad-based search platform.

Checkout ultimately morphed into Google Wallet without a much different result. Wallet launched in 2011 using NFC and an app on a phone to allow consumers to store payments, loyalty and gift cards and to transact at merchants that had NFC and integrated with their spec. Wallet struggled to ignite because only one carrier (Sprint) and issuer (Citi) would support it. There were more people struck by lightning in the U.S. in the early days of Google Wallet then had a handset with Sprint as the carrier and an active Google Wallet app with a Citi card in it on their phone.

Google Wallet has since retrenched. It launched HCE as a way around the carriers and pulled away from its pursuit of instore and online point of sale ambitions to focus on powering the purchase of digital goods in Google Play. It’s also integrated with Gmail to enable consumers with Gmail accounts to send money to each other (and for Google to acquire credit and debit card account numbers in the proces). And its Google Shopping Express service enables same day delivery when orders are placed with local stores and paid for using Google Wallet.

Yet Google has found it very tough to shake the perception by merchants that it isn’t just after their data to enrich its core business. That’s a point that Apple not so subtly pointed out during the launch of Apple Pay, emphasizing that Apple doesn’t want nor does it even see consumer transaction data. That, Tim Cook said, belongs to the issuers and the merchants. Cook also reiterated that point in his Charlie Rose interview, saying that to know a company is to follow the money. And, in the case of Google, the merchants know where that trail leads:  advertising and the monetization of data for that purpose.

Then there’s Samsung.

Of all of the handset players that operate Android, Samsung has the largest share. In fact it has the largest share of handsets worldwide – period. Its rivalry with Apple is well documented (and has made a lot of lawyers rich). If ever there was a player with the fire in their gut to control an ecosystem to rival Apple, it is Samsung.


Over the years, Samsung has touted a forked version of Android to mixed reviews – users obviously  love their handsets but say “meh” to its native apps, including Samsung’s version of chat and mail. Recently, Samsung has joined forces with PayPal to integrate its payments capabilities into its smart watch, complete with biometric sensors (and cardholder present rates, according to the networks). PayPal also released its mobile app for the Galaxy 5S earlier in the year that is compatible with Samsung’s  TouchID equivalent.

Now to answer the question at the top of the article. Who’s best suited to “control” the Android operating system?

Here are the characteristics of the winner. They need to control hardware, software (an operating system) and the developer community and enable payment in much the same way that Apple Pay and Apple do. Whoever does that will then win the hearts and minds of consumers and merchants. And they need to negotiate with issuers and the networks and maybe even the merchants.

Google is working hard to button up the developers’ side of the ecosystem and has a mobile payments apps but one that hasn’t gotten much traction with consumers or merchants. It had a handset manufacturer under its control, Motorola, that it sold. It has solved the carrier aspect of NFC with its HCE capabilities. Google has two challenges – getting issuers to play along and persuading an OEM with enough critical mass to take its assets and run with it to the top of the Android ecosystem. And of course to make peace with merchants who view Google as a pirate looking to loot their data and sell it to their rivals.

The most logical player for them to persuade is Samsung. Samsung has a popular handset, a global footprint and the leading share of Android mobile phones. There’s just one small complication. Samsung now also, it seems, has a burgeoning relationship with a certain global payments player in San Jose with 160 million digital apps, and in-store, online and in app payments capabilities and merchant acceptance.

Just looking at the numbers, a Samsung/PayPal combination gets pretty interesting pretty fast  – lots of handsets and hundreds of millions of active digital accounts. But there are two wildcards.

One is the developers community – can the combination of Samsung plus PayPal and its Braintree platform provide developers with enough of an incentive to develop applications that make payments in that mobile ecosystem valuable enough to consumers  – and ultimately merchants? And the second is whether hitching Samsung’s wagon to PayPal gets them into trouble with issuers. Over the years, PayPal has had trouble convincing issuers that they aren’t out to disintermediate them. It’s possible that all of those conversations take on a different tone now that Apple Pay is in the market and banks begin to internalize the impact to them, their brand and their business model in a world where the Apple Pay brand is front and center in the consumer commerce experience.  I think we all agree that we know Apple way too well to think that Apple Pay, which is only about payment, will stay that way for very long.

As  we ponder the future of the other “A” player  in mobile payments, a few thoughts come to mind.

First, who’ll emerge to be the ecosystem major domo? Google? Samsung? PayPal? MCX/CurrentC? Some combination thereof? Amazon? It’s created its own version of Android, has the Fire phone (which at the moment is as cold as ice), 200 million digital accounts and a developers community it is trying to incent. You’ll notice I left some other names out. That was purposeful.

Second, for the mobile payments ecosystem overall to ignite, it needs an Android ecosystem major domo to assemble a critical mass of consumers who are incented to use their phones instead of cash and/or their debit cards to pay at merchants that are in the everyday spend category. If one were to take a look at the merchants that are part of the Apple Pay launch,  roughly 49k of the ~56k merchant stores that accept Apple Pay are places where people probably do just that. And since Android has more people in more of the demographic that use cash and debit cards at those places, getting them into the habit of using phones and not an alternative form of payment will be one of the rising tides that lifts all mobile payments boats.

Apple Pay Merchants
(As of September 9, 2014)
Apple Pay Merchant Locations
Subway 25.5
McDonalds 14.1
Walgreen’s 8.1
Staples 1.8
Panera Bread 1.8
Petco 1.2
Toys R Us/ Babies R Us .872
Macy’s .740
Whole Foods .350
Sephora .325
Disney .320
Nike .250
Duane Reade .250
Total 55.6 stores

And, then finally, any way you cut it, igniting Apple Pay will take time. Enough consumers with the right phones have to be inspired with the right value proposition beyond payments at enough of the merchants that matter to them. That doesn’t mean every merchant, but it does mean a list that goes well beyond this one! And, naturally, all of us will use Apple Pay to pay, but we live in the mobile payments super bubble. Most people don’t and will need to re-trained how to use their phones instead of cash and cards in the stores.

That means that the Android ecosystem has a little time to get itself sorted out and the players who are vying for the major domo role have a chance to think strategically about how to play their cards.

I’ll end with a big question that will ultimately be on the mind of that major domo in waiting.  Apple aligned itself pretty tightly with the existing payments ecosystem. Will the Android general have to do the same and if so, does that mean that alternative payments, based on ACH, are out of play?

As I said before, the mobile payments game has gotten interesting and will be an exciting place to be over the coming years. Really glad to have a ringside seat!