Google Gets Aggressive in Mobile Wallet Rollout, But What's Next?

Editor's Note: This post originally appeared on PaymentsSource's Interchange blog.

Google's rapid-fire rollout of KitKat, the latest version of its Android mobile operating system, is likely to enroll a substantial number of new users to the company's mobile wallet. But the burning question is: once we're all signed up, what is Google's next step?

The deployment of KitKat is especially noteworthy because it's happening so fast — much of the coverage of Google's software highlights how unusual it is to see a major operating system update proceed without significant carrier-imposed delays.

The previous iteration of the operating system — Versions 4.1-4.3, collectively known as Jelly Bean — still holds 54.5% share of Android devices, according to Google's Android developer website. But KitKat (Android Version 4.4) managed to build a 1.1% share of devices in the first month of its release, which is only expected to grow as new devices and updates come to market.

As soon as KitKat arrived on my Moto X handset via AT&T, the operating system prompted me to approve tap-and-pay payments for Google Wallet. There was no further enrollment — because Google Wallet absorbed the online payment system Google Checkout in 2011, it already had two of my credit cards.

To pay at the point of sale, a user just has to unlock the phone. The software does not require the user to open the Google Wallet app, though it may prompt for a PIN if the consumer hasn't used Google Wallet recently. When testing the app, I held my phone against the contactless card reader at a grocery store, and a receipt popped up on my screen just as a paper receipt printed out at the cash register. That was pretty much it.

The sign-up process is eased by Google's implementation of Host Card Emulation, a new feature in KitKat that mimics a Near Field Communication contactless signal without requiring access to the phone's secure element. AT&T, Verizon Wireless and T-Mobile had resisted the old way of using NFC with Google Wallet, with Verizon being particularly outspoken about its security concerns.

These three carriers also back the Isis mobile wallet, which relies on NFC and requires an enhanced SIM card. Isis rolled out nationwide in mid-November and to sign up for it, a PaymentsSource reporter had to walk into an AT&T store to receive the special SIM card. A reporter at our sister publication, American Banker, had to request an enhanced SIM card by mail. The Isis app and enhanced SIM card work only on a subset of Android phones (as of this writing, the Moto X is not supported by Isis on any carrier).

So Google clearly has streamlined the sign-up and payment processes. But it has a lot of work still cut out for it.

There are some obvious drawbacks to using Google Wallet as a consumer. One issue is related to Google's use of a virtual MasterCard account to handle payments at the point of sale. Google implemented the virtual card to make it easier for consumers to link any bank account or credit card as a funding source for mobile payments, but the merchant only ever sees the virtual card number.

If a credit card issuer provides rewards for shopping at a certain category of merchant, the consumer may not earn those rewards when using that card to fund a Google Wallet purchase. Google is passing the merchant's name along to the card issuer, and in my test the grocery store's name appeared on my credit card statement, but Google's fine print is clear: "Rewards and benefits, if applicable, will be decided by your card's issuer … If you receive additional rewards when shopping at a specific merchant, these benefits may not be applied when using Google Wallet."

The virtual card account also raises some confusing customer service issues. For example, when a consumer makes a return, in "rare cases," Google will credit the funds to a different linked card than the one used for the original purchase.

Another major issue is Google Offers. Many mobile wallet initiatives rely heavily on offers and discounts to entice consumers to use a phone to pay instead of using a card. Google Offers launched alongside Google Wallet, but can also be used as a standalone app or as part of Google Maps. The redemption of offers is not actually tied to the use of Google Wallet.

Google Offers' independence from Google Wallet may have been necessary when Google Wallet wasn't available on AT&T, Verizon Wireless and T-Mobile phones. But Google Wallet is finally bridging the gap.

Right now, my plastic card's rewards program is the deciding factor in whether to swipe my card or tap my phone. And because consumers can't be sure that a card's issuer will properly apply rewards when using Google Wallet, Google has to make Google Offers more compelling than any issuer's built-in rewards program.

Google Wallet has undergone several major revisions since it launched, and the product today looks nothing like the original. The issues Google solves with KitKat were among its biggest hurdles, but it's still too soon to declare a winner in the mobile wallet race.

Daniel Wolfe is the editor in chief of PaymentsSource.