Google Wallet Puts Banks In Its Pocket
Google Inc. isn't asking for a share of the payments revenue generated with its new mobile wallet. Nevertheless, partnering with the search engine juggernaut could be a trade-off for banks.
Google plans to make money through an associated service in which merchants pay to display coupons on the phone screen. Banks may be leaving money on the table if they allow Google to keep all of that advertising revenue for itself, some experts said.
"For Google not to give them a piece of that revenue pie from the promotions … forget it. I wouldn't do it," said Brad Strothkamp, a principal analyst at Forrester Research Inc.
The Google Wallet app allows a consumer to load her debit or credit card information into a mobile phone that runs on Google's Android operating system. The consumer can then pay for purchases by tapping the handset against a terminal at the checkout counter. The allure for banks is that they stand to capture a greater share of a consumer's spending if the card can be used so easily.
But Strothkamp said there is a precedent for banks taking a cut of the kind of revenue Google will collect — many vendors offer merchant-funded reward programs that share revenue with banks. These vendors could attach their programs to mobile payment apps, Strothkamp said.
Peter Ho, the product manager for card services and consumer lending at Wells Fargo & Co., would not say whether it plans to work with Google, but he said the wallet service is a positive development for mobile payments.
"One of the neat things about the Google announcement is they've taken NFC" — near-field communication technology — "beyond payments, and I think that's a significant thing in terms of … why banks are paying attention to it," Ho said.
Still, he said that signing on would be a compromise compared to banks' previous approaches to mobile payments.
The release of the Nexus S, the only Android smartphone that includes an NFC chip, "changed the game a little bit," Ho said. "Suddenly the bank is no longer the owner of the wallet, like it or not. If we want to play, we kind of have to be part of this mixed wallet or this open wallet because that's about the only way we're going to be able to get onto that phone."
Google's system is built on NFC technology preinstalled in Android smartphones, a cleaner integration of NFC technology than what many banks have used in trials.
Wells Fargo and U.S. Bancorp, for example, are testing an add-on memory card with an embedded NFC antenna, provided by Visa Inc. and DeviceFidelity Inc. Wells Fargo is testing the memory card with 200 employees in San Francisco.
"It's a bridge technology," Ho said. "We've always intended it to be a bridge technology in the sense that … there would be NFC handsets in the market in the future."
Google, of Mountain View, Calif., is testing its wallet service in New York and San Francisco. It will initially allow consumers to make direct payments from certain MasterCard Inc. credit cards issued by Citigroup Inc., though it also offers a Google prepaid account that can be funded with any payment card.
Google said its goal is to add more banks, allowing consumers to potentially register any card they have currently. Other experts say that Google's size and its strength in paid search and advertising provide financial institutions with a much larger platform than what they could build themselves.
"The reality is this is a scale and execution play," said Philip Philliou, a partner with the consulting firm Philliou Partners LLC in New York.
"Because it's Google," Philliou said, "it has the potential to scale very quickly in a very significant way. If Google desires to monetize the advertising piece, which is their core competency, and the card issuers are left to earn their revenue based on payments, that's a very fair and equitable division, and I think both parties should be happy about that."
Google's platform keeps the traditional economics from card transactions intact, said Paul Galant, the chief executive of global enterprise payments at Citi.
"Citi's not doing this to get a share of Google's advertising revenue and [Google is] not doing this to get a share of Citi's payments revenue," Galant said.
Some bankers insist that issuers will be integral to any mobile payments system that aspires to wide-scale adoption.
"The implied threat is the fact that there are interlopers that are nonbanks getting into mobile banking," Richard Davis, the chairman, CEO and president of U.S. Bancorp, said at a Sanford C. Bernstein conference Thursday in New York. "The best news of all, no matter what story you read, wherever you read it — it can be a very high-profile Internet company, it can be an amazingly impressive phone company — but we still own the relationship and you still need to move it through some merchant acquirer." U.S. Bancorp owns the merchant processor Elavon Inc.
"The bank and Elavon still have squatter's rights and if we don't mess that up, both independently and as an industry, it's ours to give away and we're not going to let that happen," Davis said.
Banks may be attracted to Google Wallet by more than just Google's advertising muscle.
A Google spokesman declined to discuss the specific terms of its business relationships pertaining to the wallet service but said in an email that it will not make money off of the payment transactions.
Citi is using Google Wallet as just one part of its overall mobile payments strategy, Galant said.
"We are not in any way limiting ourselves to any one avenue or even business model," he said.
Drew Sievers, the chief executive of mFoundry Inc., a vendor that develops mobile apps for banks, agreed banks could approach NFC payments on their own but said they would face big hurdles that make a service like Google's an attractive alternative.
His company has its own "NFC integration strategy," but Sievers said he is focusing on how mFoundry's technology can integrate with players like Google or Isis, a joint venture of AT&T Inc., T-Mobile USA and Verizon Wireless that is developing a competing mobile wallet system.