Can Google Profit From NFC Technology?

| About: Alphabet Inc. (GOOG)

In addition to allowing people to share documents, music and other media, Near Field Communication, or NFC, also allows customers to pay for goods and services at participating retail outlets using bank or credit card information stored on NFC chips (the exchange of information occurs when two NFC devices come into close proximity with each other). And while many analysts agree this technology could help reduce instances of fraud or identity theft, the technology has been slow to catch on, especially in the United States.

Last year, in an attempt to enter the NFC market ahead of the competition, Google (NASDAQ:GOOG) created Google Wallet, an NFC-based payment system that Sprint (NYSE:S), T-Mobile and Virgin Mobile customers can use to make payments at retailers equipped with NFC-compatible POS systems. As other mobile phone manufacturers and phone service providers introduce NFC to customers, mobile wallet systems like Google Wallet should increase in popularity.

Retailer Reluctance

One major hurdle Google faces right now is lack of compliance from retailers to upgrade POS systems, however. Upgrading POS systems to accept payments using NFC technology may not be a problem for large retailers with lots of free cash flow, but these upgrades pose significant problems for small businesses that just don't have the financial means to invest in new payment collection equipment. And while several credit card issuers including Visa (NYSE:V), Mastercard (MA) and American Express (NYSE:AXP) have put pressure on retailers to make the necessary upgrades, it will still take several years for most businesses to complete the transition.

In the meantime, customers with NFC compatible smartphones will have to rely on older methods such as swiping a card or using cash to pay for goods and services. In an effort to build the Google Wallet brand despite limited cooperation from a large portion of US retailers, it is rumored that Google may introduce a Google Wallet card that allows customers to upload banking and credit card account information to the card to use when making a purchase - customers would swipe the card as they would traditional debit or credit cards.

Agencies like the Smart Card Alliance hope most retailers upgrade their POS systems by 2015 so customers can use NFC technology on a regular basis.

Mobile Wallet Systems

Entering a new market ahead of the competition may or may not lead to increased profits, especially when the marketplace isn't fully established. While customers seem enthusiastic about NFC, retailers remain hesitant to invest in expense equipment and software. But increased competition may help calm retailers and increase awareness of all the benefits of NFC.

Recently, three phone service carriers, AT&T (NYSE:T), Verizon (VZ) and T-Mobile joined to launch a mobile wallet system similar to Google Wallet. The Isis Mobile Wallet Network, which recently debuted in Salt Lake City, Utah, and Austin, Texas, allows customers of these carriers to make payments via their smartphones. With plans to quickly add additional NFC-compatible devices, Isis may prove a tough competitor for Google and help propel NFC technology into the mainstream.

Another wallet system, developed by The Merchant Customer Exchange, may also provide ample competition for Google. The group, made up or retailers including Target (NYSE:TGT), Wal-Mart (WMT) and Best Buy, could also help erase lingering doubts retailers have about upgrading POS systems.

Even though Apple (NASDAQ:AAPL) chose not to include NFC chips in the recently released iPhone 5, the company has developed an app, called Passport, which allows customers to scan and upload information such as flight and hotel reservations to use in places that feature optical check-in terminals.

European Marketplace

Even though progress has been made to upgrade POS systems in Europe for customers to use their smartphones to make payments, many retailers in Europe are just as reluctant to upgrade POS systems as U.S. retailers. As a result, Google has encountered similar problems in expanding Google Wallet in Europe.

With an estimated 22.8 million NFC compatible smartphones to be shipped throughout Western Europe this year, and an estimated 30 million smartphones shipped in the U.S. during 2011, Google has the opportunity to see a return in both markets once retailers make the necessary upgrades. Continuing to invest in both markets seems to make the most sense for now until the competition grows too fierce or if retailers fail to move forward with upgrades in a reasonable amount of time.

The Bottom Line

Since conquering the smartphone marketplace with Android OS, moving into the NFC market isn't a big stretch for Google. With encouraging numbers including a profit margin of 22.20% and an operating margin of 28.06%, Google can wait a little longer if necessary to see a return on Google Wallet. For now, the company has plenty of other projects. With sales and revenue totaling $37.86 billion in 2011, up from $29.12 billion in 2010, Google will remain profitable while it waits to make its next move in the NFC technology market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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