The internet giant is set to announce its NFC mobile payments strategy at noon on 26 May in New York. Here are the key things to look for to work out if the company’s strategy will succeed — and what it means for the payments industry, the mobile network operators, phone manufacturers, the firm’s competitors and the future of Google’s own advertising business.
Google is set to unveil its plans for NFC mobile payments at an event in New York, beginning at noon today, 26 May. The internet is rife with speculation over what exactly Google will announce, who its partners will or won’t be, and what it means for Google’s existing competitors and the array of businesses that the announcement could affect and disrupt.
Will Google’s announcement herald a revolution in the payments, mobile and advertising industries? Or will it simply be a case of existing players moving from cards to mobile phones with old business models simply wearing new, mobile clothes? Here are the eight key points to look out for that will decide who will be the winners and who could be the losers:
- Is this the birth of a new payments network, or an old network in mobile form?
- Who owns the secure element?
- How will Google generate advertising revenues?
- How much will merchant terminals cost and what benefits will they offer?
- How open will the service be?
- Will this be an Android-only service?
- What’s the deal with Sprint?
- What if Google’s just a junior partner?
Below we examine each in detail…
1. Is this the birth of a new payments network, or an old network in mobile form?
Rumours suggest that Google will be partnering with MasterCard to bring mobile payments to market. If that turns out to be true, it’s a definite win for the old guard. The current payments infrastructure is built on principles that were defined in the 1970s when credit cards as we know them appeared on the market. It’s ripe for disruption and Google has the perfect skillset for doing so. Both MasterCard and Visa have looked at risk of disintermediation.
If there is a deal with MasterCard, the key will lie with the role the payments network will play and this could fall under one of two options. The first would see standard, MasterCard-branded payments cards simply moved across to the mobile arena. In this scenario, it’s likely that Google has tried but not succeeded in finding an economically viable way of building an alternative to the incumbent payments networks. And, if Google can’t do it, the chances are that the likes of Apple and PayPal won’t be able to either. That’s good news for the existing payments players, but may not be such good news for merchants hoping to get lower transaction fees or consumers looking for a truly new way of running their finances.
The second scenario would see Google buying in expert services such as fraud prevention from MasterCard, but would have the payments system running on new “rails”, most likely built on Google’s expertise in internet communications and cloud computing. Here, there’s much more room for innovation in technology, product/service offerings and business models. The result will be more of a win:win for the old guard and the new, but could also signal a change in the balance of power between Silicon Valley and the payments industry.
2. Who owns the secure element?
All sensitive data, such as card numbers, stored on an NFC phone is kept safely in a special chip known as a “secure element”. This can be built into the SIM cards issued by mobile network operators, into microSD cards that also contain the NFC antenna that makes close proximity communications possible or, as in the case of the Google Nexus S, it can be on a chip embedded in the mobile phone during manufacturing.
It’s this secure element that provides consumers with their mobile wallet. And it is the company that controls it which is in the pole position when it comes to generating revenues from NFC services. With an NFC SIM — like those which will be used by the Isis joint venture between AT&T, Verizon and T-Mobile — the mobile network operators control the keys to the door and can maximise revenues. With a microSD, it can be anyone. With an embedded secure element, it would usually be the manufacturer of the phone. This is expected to be the case with RIM’s forthcoming Blackberry NFC phones and is almost certain to be the case with a future Apple iPhone.
What happens in an Android phone, though? With the exception of the Nexus S, Google isn’t the handset maker. But it’s Google that has developed the Android operating system and is driving the adoption of NFC in Android devices. Has Google constructed its business model in such a way as to provide handset manufacturers with an incentive to begin putting NFC Android phones into large scale production at last. If so, how and at what cost? And how will Google gain control over a secure element built into a phone by a handset maker it doesn’t own?
3. How will Google generate advertising revenues?
So far, Google’s NFC advertising efforts have been based on NFC tag reading technology, allowing consumers to read a tag outside a restaurant or other merchant to go directly to the traders’ Google Places page to view menus or product details and read ratings and reviews. This is clearly going to continue to be a core component of Google’s NFC offering, and a new update to Google Maps for Android that adds the ability to easily check in to a business and rate/review it from within the app shows the company is continuing to invest here.
When Eric Schmidt unveiled Google’s NFC vision at the Mobile World Congress in February, however, he painted a picture of something significantly more complex. Schmidt’s vision was for a service that let Google send tightly targeted promotions to consumers based on their previous purchasing history.
NFC systems are usually constructed so that each of the different payments mechanisms stored on the secure element are kept in carefully separated compartments. This means that card issuer A, for example, cannot possibly gain access to information in the compartment owned by card issuer B — and the controller of the secure element, whether that’s the handset maker or the mobile operator, can’t get access to any of the data stored by any of the compartment owners.
That means Google will need to provide a payments service of its own — a Google Money account, for instance — or tie up a deal with MasterCard and card issuers like Citi to gain access to back office transaction databases. Alternatively, Google could be planning to use a variety of other technologies and approaches to build a picture of consumers’ shopping habits and their current location without knowing exactly what, where and when they have made purchases. These could include, for instance, GPS data and NFC tag reading capabilities, overlaid with opt-in marketing databases, shopping preference engines and coupon redemption histories.
Detailed knowledge of consumers’ shopping habits, combined with knowledge of their current location, can be used to identify their likely intention to make a particular type of purchase in the near future and to change their intended purchase from one product or merchant to another. That will be key to the company being able to offer advertisers the kind of services Eric Schmidt outlined in February, and to Google’s long-term success.
4. How much will merchant terminals cost and what benefits will they offer?
We’re expecting the announcement to include details of merchant hardware that can both process payments and deliver marketing programmes such as loyalty cards and coupons. Verifone, Ingenico and Vivotech are all believed to have been contracted by Google to develop devices and these are expected to be available at much lower cost than has previously been the norm.
How much will the equipment cost to make? How much will it cost merchants to install? How far is Google willing to subsidize merchants in order to persuade them to put the equipment necessary to handle NFC payments in their stores? Might they even be free for certain types of merchant? And, if so, how many free/subsidized terminals will Google be making available? Or will the company put together a package of benefits for merchants compelling enough that they are willing to pay full price?
5. How open will the service be?
Everyone says their NFC service is open. But ‘open’ can mean many things. The critical question revolves around the back office infrastructure that will be deployed and how access to the secure element will be managed.
Will businesses wishing to offer NFC services to their customers need to go through — and pay — Google or an appointed Google trusted service manager to do so? Or will a truly open infrastructure be provided, where businesses can choose whichever supplier they wish to provide them with their NFC services and a variety of specialist NFC service providers will be available for their suppliers to choose from?
Will any business be able to get access to Google mobile wallets — even direct competitors like Microsoft and Apple — or will Google lock them out? How about the likes of Groupon, PayPal, Facebook and Visa? And who will these businesses go to instead to access the new generation of mobile wallet technology if they can’t access a Google Wallet?
6. Will this be an Android-only service?
There are huge implications here for the market share Google is likely to achieve from NFC-based advertising and, since the company looks to be betting heavily on NFC as its route to mobile advertising as a whole, for Google’s overall future revenues. Will we be looking at the equivalent of Google providing AdSense advertising only to AOL subscribers? Or will it be able to reach everyone, as it does on the internet today?
7. What’s the deal with Sprint?
The prospect of embedded secure elements arriving on NFC phones has been creating serious tension between phone manufacturers and mobile network operators as both sides seek to take advantage of the revenue opportunities available to the controller of consumers’ mobile wallets. Mobile operators are responsible for placing volume orders for phones so their agreement to stock particular phones is key — and RIM has already encountered resistance from mobile operators for its mobile payment plans.
If Google announces a partnership with Sprint, the terms of the deal will have major implications not just in the US but in many other countries as well. Operators around the world are working to create business models that let them derive real added value revenues from NFC — and avoid having mobile payments become yet another service where they simply act as ‘dumb pipes’.
Significantly, Sprint is the only one of the US’s four major mobile network operators not to be part of the Isis NFC joint venture. Last month, the operator’s vice president of product platforms confirmed plans to introduce an ‘open’ NFC payments service this year. The idea, Kevin McGinnis explained, is that “Sprint could share in revenue from sales off coupons sent to its customers’ handsets or targeted advertising.”
How will that work out with Google? Will Sprint be the first operator to publicly agree to work with handsets that have an embedded secure element outside their control? Or will Google be the first from the handset side of the battle to abandon the idea of an embedded secure element in order to get a good distribution deal with a mobile operator delivering NFC services via the SIM?
8. What if Google’s just a junior partner?
Not everything Google does turns to gold. And NFC is still very much an emerging technology. What if Google announces something much smaller in scale and scope than we’ve outlined above? Or one where Google simply provides Android with the capability to store payments cards but Google gets no share of the revenues and no unique insight into consumer spending habits?
Everything points to Google having bigger plans than that. But commercial NFC services have not been expected to arrive in volume until 2012 and the technology has so far been little tested in a real world environment with any scale. Will that leave the door open for Apple and Isis to seize back the initiative?
• Buyers of our NFC Business Models research report are already well prepared for whatever Google’s announcement holds. They know what their options are, how to weigh up competing NFC service offerings and where the value lies within the NFC ecosystem. You can order your copy here.