Let’s start with the basics.
First, the ostensible goal is to get rid of the antiquated multiplicity of insecure credit cards and replace them with your smartphone…your smartphone is your wallet.
Second, “near field” really is just that: Short-range (4cm, 1.5”) wireless communication between the Point Of Sale (POS) terminal (calling it a “cash register” no longer seems fitting) — and the smartphone.
The use scenario is obvious: In line at Safeway, after all the articles for the Memorial Day BBQ have been scanned, I wave my smartphone and off we go. Quick and simple.
The prospect of contactless debit/credit transactions has been around for a long time. Decades ago, GSM phones, which contained a reasonably secure SIM module using SmartCard technology, were seen as a replacement for plastic payment cards. A bit later, I remember a Northern Europe vending machine demo: Each item was associated with a phone number; dial the number and the beer can falls. Next month, the transaction appears on your phone bill, as the carrier agreement dictates…just like with Minitel transactions. (Note the carrier role, to be revisited.)
These old examples don’t involve near-field communication, but they point to an old desire: We can do better than cash and cards. Other companies — Vivotech, Verifone — have tried to either replace or supplement the debit/credit card.
The basic idea is unchanged: The card is a token, a unique number encoded in a magnetic stripe. The latest notion is to store the number on another medium, one that can be read without contact, through a short-range wireless connection
It sounds simple, logical, fast, and safe.
But, so far, contactless replacements for debit/credit cards have failed to take the market by storm.
One reason for the modest success of NFC payment systems is the consumer’s entrenched habits and cognitive obstacles. “Plastic” is well understood, it works, it’s accepted everywhere around the world — and each card is a totem of a distinct account. Well-meaning experts saw that the “magstripe” had more than enough room to store the information for a dozen credit cards and tried to promote multi-account cards. It didn’t work. Merchants and customers found the invisible abstraction of a “multi-card” difficult to manage. By the same token, pardon the pun, consumers today see little benefit in making their familiar, physical cards disappear into a contactless device, whether it’s a dongle or a cell phone.
Nonetheless, the desire to do better than the old, dumb, insecure plastic refuses to die.
Enter the smartphone. As Brian Hall, the Smartphone Bard, likes to say: The smartphone destroys everything. Particularly business models.
Smartphones have taught us the benefits of a multi-use device: Multiple accounts for email, Facebook, iTunes, Amazon, in addition to the phone, camera, and mp3 player. Further training is provided by uses such as smartphone boarding passes that are displayed and scanned at the gate: A nice example of a reasonably secure method of authenticating a transaction.
(Speaking of transactions, smartphones play an ever larger role in commerce. AdMob, Google’s mobile advertising arm, receives 3.5 times more requests than a year ago.)
In November 2010, AT&T, T-Mobile, and Verizon — the usual suspects — formed a smartphone contactless payment alliance called Isis. American Express jumped in the fray, and Visa followed with its own contactless payment proposal. Other smaller but more agile players such as Mopay and Boku, to name but a few, will make the fight between incumbents and newcomers interesting to watch — and perplexing for merchants and consumers.
Perhaps the big carriers were reacting to rumors that Google and Apple were getting into the NFC payments game, or maybe they authentically sensed the possibilities, the torrents of money, a chance to increase the sacred ARPU by getting a cut of contactless payments. In any case, they had a concept. As for the implementation… Visit the news section of the Isis website and you’ll see how far these carriers are from an actual solution.
Google Wallet takes the concept much further. They’ve looked at the problem through the lens of their one and only business: advertising. With Google Wallet (I don’t know if they’ll claim ownership of the latter word) on your smartphone, you’ll get much more than a contactless credit card replacement. You’ll see ads and receive promotional emails, store coupons for this weekend’s deals — from pizza to electronics — and be able to use payment alternatives such as Google Checkout. Compare this with the “old” process: see an ad in the Sunday supplement, clip the coupon, make sure you stuff it in your wallet, go shopping, whip out the coupon at the cash register, pay with your card. For merchants, Google’s NFC is the link to a seamless marketing campaign: Lure customers with special offers and then offer a smooth transition from promotion to “e-coupon” to purchase and payment.
This could be big…if Google can get it to work. They have the means to do it, to make it a standard, and they could reap massive amounts of payment processing revenue and additional advertising as a result.
But…matters of implementation are likely to interfere.
Even if consumers continue to accept the concept of a unified account device, there’s still the problem of the “physical plant”, the infrastructure of tens of millions of credit card terminals around the world. Going NFC means replacing these well-debugged and cheap magstripe readers with hybrid contactless + magstripe machines — a hugely expensive proposition. Who’s going to pay for the hardware upgrade: the merchant, the payment processor, or the customer?
And the (big) carriers might get in the way if they perceive (as they should) that Google is trying to disintermediate them. Currently, Google Wallet is only available through the Sprint Nexus S phone. Visa/AT&T/Verizon are conspicuously absent in the announcement. For Google Wallet to succeed, carriers will have to distribute Wallet-enabled Android phones, or perhaps Google will “openly” force every Android licensee to carry the Wallet (hardware + software).
Google is right: Replacing credit cards with smartphones is a great idea. Further, Android being Google’s way to break into the new business models created by the smartphone revolution, Google Wallet is a logical outgrowth, an unavoidable tentacle.
(On Google’s overall disintermediation strategy, read Bill Gurley’s terrific and, for some, terrorizing piece: The Freight Train That Is Android.)
But, as we’ve seen with social networking — ad with Google’s older payment system, Checkout — simply being a logical component of Google’s arsenal doesn’t always mean success.
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