In line with Apple’s APPLE INC.
philosophy that being the best trumps being the first, Apple Pay was unveiled last month and is set to roll out this month. Google ALPHABET INC.
was one of the first tech heavyweights to jump into the mobile payment space, launching Google Wallet way back in September 2011.
Three years later as Apple is preparing its own entry, the odds are stacked in its favor. As both services use near-field communications (NFC) as the underlying data transmission technology, this isn’t about any technological advantage. It’s about everything else.
Here are all the areas where Google could have done better, and how Apple stands apart.
Apple’s list of launch partners for Apple Pay is rather expansive. This list includes the 3 dominant payment networks and 6 card-issuing banks. It’s a veritable who’s-who in the financial sector, including Visa, MasterCard, American Express, Bank of America, Capital One, JPMorgan Chase, Citi, and Wells Fargo, and they’re all onboard.
In contrast, Google had just one card issuer partner (Citi) and one payment network partner (MasterCard) at launch, although it added Visa and American Express to the mix a year later. Wireless carriers were a significant hurdle to Google Wallet, in some cases blocking the app. Google Wallet founding engineer Jonathan Wall once said, “With Google Wallet, we had one point of failure — the carriers.”
Even today, only Sprint supports Google Wallet. Android OEMs are still far more susceptible to carrier control, as they still require carrier approval for software updates. Meanwhile, Apple is able to distribute software updates independently of carriers, and is generally capable of operating outside of their jurisdiction.
With an industry as large as payment processing, with a plethora of tiny fees behind the scenes as payments make their way to the final destination, you need to get the big financial players onboard while cutting carriers out of the loop. That’s exactly what Apple has done.
Google is notorious for generously sharing revenue with partners in most aspects of its business, and payments are no different. In fact, Google could be too generous with sharing payments-related revenue. Last summer, Bloomberg Businessweek profiled Google Wallet, noting that the search giant pays such hefty fees to credit card companies that it loses money on each transaction. That’s made the division something of a money pit. Tepid consumer adoption also didn’t help.
On the other hand, Apple has negotiated deeply discounted fees from the financial institutions. The institutions are granting Apple the “card present” rate, which is lower than the “card not present” rate, due to reduced risk of fraud (more on this later). The company has even reportedly scored a 15 to 25 basis point discount on the normal “card present” rate, which is approximately 1.5%. Additionally, Bloomberg reported last month that Apple would collect fees on each transaction.
It’s not as if Apple is looking to Apple Pay as a new revenue stream for growth. Rather, it will likely use it as a moat-building tool like iTunes, which Apple has long maintained operates around breakeven. So long as Apple Pay can operate at break-even or slightly cash flow positive, the service will have an economically viable model to sustain itself, unlike Google.
Recently, Apple has been taking a hard stance on privacy. Tim Cook recently penned a letter on the matter, not so subtly taking jabs at Google’s ad-based search business. Privacy was also detailed at length during Apple Pay’s introduction, as Apple will not collect any data about Apple Pay transactions.
Google’s inevitable goal with Google Wallet was to collect data on purchase behavior, in order to increase the relevance of targeted product ads. But that only happens if consumers adopt the service, which they haven’t.
It’s debatable how much this type of privacy matters to the average consumer. After all, most people are accustomed to enduring ads in exchange for free services, and sacrificing some level of privacy is just par for the course. Still, Apple is hoping that consumers start caring more about their personal data.
The key to Apple getting discounted rates was that it agreed to bear some of the fraud risk. The company is comfortable doing so because it has biometric security in the form of Touch ID, and is implementing a tokenization system for added security.
Tokenization masks the underlying credit card number and instead uses a randomly generated number. These tokens can be used once, or transaction-specific, which makes them powerful security tools against hackers and criminals. This also makes life easier for merchants, reducing the security requirements around storing actual card numbers.
Google Wallet does support tokenization, but Google uses a cloud-based tokenization process. That reintroduces other security risks since payment data is being stored on Google’s servers as opposed to locally on the device-level. Additionally, the platform’s hardware fragmentation means that Google Wallet’s feature set is not ubiquitous. Some Android phones have NFC chips; others do not. Some Android phones have secure elements; others do not.
To be clear, Apple didn’t invent tokenization (although it has patent applications related to tokenization dating back as early as 2009). Tokenization has been aroud for ages, but embracing it to this extent by having integrated hardware and software gives Apple Pay much stronger security compared to Google Wallet, which in turn builds consumer trust.
This is arguably Apple’s greatest advantage. The company has always prided itself on offering the simplest and most elegant user experience. From a user perspective, the payment process couldn’t be simpler thanks to the improved performance of the Touch ID sensors in the iPhone 6 and 6 Plus.
Since the biggest challenge to mobile payments has always been improving the payment experience, which is already fairly simple, the hurdle is quite high. Unlocking your phone and entering a PIN is only modestly faster than swiping your card. But merely holding your finger on a sensor, without having to unlock your iPhone, is even modestly faster still.
Winner: Apple Pay
Apple has put together all of the pieces of the payment puzzle into a cohesive solution. There aren’t any visible weaknesses in its strategy other than conveying the value proposition to consumers, which Apple’s marketing department will take care of.
Google Wallet is widely considered a failure from numerous perspectives, which gives a key opening for Apple to take advantage of three years later.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends American Express, Apple, Bank of America, Google (A shares), Google (C shares), MasterCard, Visa, and Wells Fargo. The Motley Fool owns shares of Apple, Bank of America, Capital One Financial., Citigroup, Google (A shares), Google (C shares), JPMorgan Chase, MasterCard, Visa, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.