- Google Wallet 1.0 was a significant failure as far as market penetration.
- A number of factors have changed which are conducive for Google to re-energize Wallet.
- I expect Google to look to scale up Google Wallet's profile within the next 6 months.
Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) initial foray into the payments space with Google Wallet 1.0 was largely unsuccessful. Rumors suggest Google spent in excess of $300M on Google Wallet, though I believe that figure is significantly understated given the investment that would have gone into subsidizing NFC terminals and paying bounties to merchants to deploy the service.
Google stumbled with wallet 1.0 for several reasons:
Google didn't understand the mobile payments ecosystem
Google assumed that it could simply buy its way into mobile payments. The reality is that mobile payments are a very complex ecosystem. Implementation of an NFC-based solution requires collaboration with network operators, merchants and terminal manufacturers to get NFC implemented. Google tried to go it alone with few partnerships, and it didn't succeed as a result.
Wallet didn't launch on a sufficient number of handsets
Google ran into obstacles with network operator ambitions around ISIS, which got in Google's way of deploying Wallet onto a sufficient number of handsets beyond just Sprint. Importantly, for an NFC deployment, Google had to go via the carrier secure element, which, not surprisingly, it generally wasn't able to get access given the US carriers own ambitions with ISIS.
Merchants weren't ready to deploy NFC
The lack of consumers with an NFC handset and the required cost of upgrade for point of sale terminals meant that most merchants didn't see a reason to deploy NFC. The net result of this was that the few consumers who actually had a NFC capable device had even fewer places to use it, reducing the utility of Google Wallet even more.
My belief now is that there are a variety of factors that suggest this is all about to change.
HCE is a game changer for Google
Host Card Emulation (HCE) in addition to being a huge win for Visa (NYSE:V) and MasterCard (NYSE:MA) also is about to deliver Google a big break. What HCE effectively does is create a secure element which is stored in the cloud as opposed to the mobile device. The cloud based secure element isn't controlled by the mobile operators and is effectively open to use for anyone.
This is significant for Google because it means Google can issue mobile payments credentials directly to the mobile device without needing to go through the mobile operator secure element. The problem that Google had previously with getting Google wallet on NFC devices is effectively gone. Google can now have Google Wallet on any NFC device.
Entry of Apple, Amazon into payments
The gold rush into payments is on. All indications suggest that Apple (NASDAQ:AAPL) is about to have an NFC enabled iPhone 6 later this year. Interestingly, this will be also be a game changer for Google. How so? Assuming Apple does come out with NFC on the iPhone 6, it will unlock a wave of merchant point of sale upgrades to terminals that are NFC compatible. Apple will effectively solve the problem of merchants not having any interest in NFC. Merchants will rush to support the large installed base of Apple users and ensure that they can support their own merchant program within the Apple's Passbook for in store use by consumers.
Google would have also noticed with interest Amazon's (NASDAQ:AMZN) recent forays into payments. In Amazon's case it's a data play to get a greater data set of Amazon user purchases outside of the Amazon portal to assist with better targeting of Amazon users.
Many NFC devices in circulation
The number of NFC phones in circulation has significantly ramped up since Google launched Google wallet 3 years ago. NFC smartphone shipments are expected to further rise from 412M in 2014 to 1.2B in 2018. That's a large embedded consumer base who will be NFC enabled. In the US, many of the top selling iconic mobile devices are all NFC enabled including the Samsung Galaxy. Samsung, LG and Motorola all having NFC devices in their portfolios.
Why does Google care about Google Wallet success?
Google's ambitions in the payments space center around obtaining transaction data to serve up targeted offers to users. The wholly grail of mobile payments is the ability to deliver real time offers at the point of sale. Practically, what this means for the retailer is the ability to increase the basket size by pushing consumers relevant-related items to go along with their purchase at the time of checkout.
For example, a $1 off coupon on a drink with a purchase of fries could stimulate a larger basket order than may otherwise be the case. This is done in a fairly clunky way today with paper based coupons, but the whole experience should be far more elegant in a mobile world. With its data and analytics capabilities, Google should be at the epicenter of this experience.
Mobile commerce is still fairly small today, but the shift is expected to accelerate steadily, and mobile commerce should contribute close to $110B in U.S. retail sales by 2017. The offers ecosystem will be a large piece of this overall opportunity and Google should be able to play a big role in enabling this.
In my opinion, Google will be back in a bigger way with Google wallet within the next 6 months. I expect more emphasis on distribution deals with merchants and more investment behind the wallet as Google looks to have a seat at the table for the revolution in mobile commerce. Success in mobile payments will take some time to play out, but Google should be a net beneficiary with an increased offer and advertising revenues.