Google's Mobile Strategy Takes a Page from Apple's Book

For small merchants who want to accept mobile transactions, Apple makes the go-to machines, the iPad and the iPhone.

But Apple has some company: Google is cultivating the same market for its Android devices.

The two bellwether high-tech companies are moving ahead with their plans with barely a nod to banks and other traditional payment companies that are themselves trying to turn phones into payment devices. Though there are some opportunities for banks to collaborate with them, such as by linking a product to Google's mobile wallet, even these deals are made on the tech companies' terms.

At the point of sale, Apple and Google are supporting systems that focus more on catering to merchants and consumers than banks. Many of Google's services generate money through advertising, and Google is extending that approach to payments through systems that pitch merchant offers to consumers.

"When you tie the ability to do couponing with payment, it is more interactive for the consumer and better for the merchant, who can control how they will play with incentives to drive people in the door," says Rich Miner, a partner at Google Ventures, Google's investment arm.

Google Ventures has invested $5 million in a Cambridge, Mass., digital game and social network company called SCVNGR, which has a mobile payments unit called LevelUp. (The venture capital firms Balderton Capital and Highland Capital put $15 million and $800,000 into the company, respectively.)

LevelUp uses a gamelike approach to shopping. Its app allows payments from any credit card and tracks merchant incentives. Customers unlock better discounts as they shop.

Miner says Google Ventures does not choose its investments to benefit Google's products. It invested in SCVNGR because of its potential as an independent business, he says.

But experts say LevelUp could conceivably be combined with Google's mobile payment system, Google Wallet.

Much like Apple's iTunes and App Store have paved the way for millions of smartphone users to make digital purchases from their iPhones, "LevelUp gets the customer used to the concept of using the mobile phone as a device for transacting at the point of sale," says Zil Bareisis, a senior analyst for Celent.

Although Apple's phones are not commonly used for point of sale payments, Apple works with numerous terminal makers that transform its devices into card readers. These companies include relative newcomers like Square Inc. and older vendors like VeriFone Systems Inc.

LevelUp could serve a similar purpose for Google, particularly with its focus on rewards. Google plans for coupons to be a major component of its mobile wallet.

"Any merchant-funded rewards program will help propel mobile payments" through smartphones "as a device to replace plastic," says Marc De Castro, research director for consumer banking at IDC Financial Insights.

Last year LevelUp partnered with American Express Co. for an incentive program that let people redeem coupons using Android phones at some Levi Strauss & Co. stores. That partnership has ended, but LevelUp says it now works with 1,200 merchants in eight cities for its own program. It says 100,000 consumers are using its application for transactions and rewards.

LevelUp's concept is not entirely new, experts say. Though LevelUp enables payments by displaying an image called a quick-response (QR) code, it is otherwise similar to Bling Nation, which used a sticker with an embedded RFID device that transmitted payment and rewards information.

Bling Nation, which closed its doors last year, required its bank partners to participate in its loyalty program. This policy drove away merchants, which preferred to stick with their existing loyalty programs. LevelUp does not require bank participation in its merchant program.

What LevelUp has going for it, beyond the backing of Google, is its strong roots in customer loyalty and merchant rewards, says Rick Oglesby, a senior analyst at Aite Group LLC.

By contrast, companies like Square and Intuit Inc. offer mobile payment devices that primarily offer steep discounts over traditional merchant acquirers. (LevelUp charges a 2% flat fee to accept transactions.)

LevelUp "is not just a payment cost-reduction tool," but one meant to increase sales and develop repeat customers, Oglesby says.

Merchants can download the LevelUp application and use it with any smartphone. LevelUp also lets them rent the equivalent of a point of sale terminal for $25 a month.

Compared to what banks typically require for payment acceptance, mobile devices are "a cost-effective entry point for these smaller merchants and [do] not require the same investment as a fully functional merchant terminal," says Paul Grill, partner at First Annapolis Consulting Inc.