NICHE

Google Wallet is a smart phone app released by Google in September 2011. Very similar to ISIS, Google Wallet hopes to help consumers by consolidating the contents of their wallets (credit cards, debit cards and gift cards) into their phones, adding convenience and reducing clutter.  Like ISIS, Google Wallet is installed as an app that takes advantage of NFC technology, allowing consumers to pay by simply tapping their phones on a terminal. Although technically NFC is capable of processing peer to peer transactions (for example, by bumping phones), neither Google nor its main competitor have pursued that market yet.

BUSINESS MODEL

One difference between Google Wallet and ISIS is in the revenue model. Whereas ISIS has aspirations of charging major credit card networks to use its ISIS system through direct fees or taking a portion of interchange, Google Wallet plans to make money by selling targeted advertisements. However, since Google Wallet and ISIS are both in early stages and currently focused on acquiring market share, no definite revenue model has been adopted yet – some reports speculate that Google Wallet may adopt a model more based on transaction fees, and others claim that they will use their relationship with Bancorp (see below) to extract an interchange fee.

CEME Presents: Google Wallet, part of the ABCs of Payments Series. CC-BY-NC

CEME Presents: Google Wallet, part of the ABCs of Payments Series. CC-BY-NC

To truly understand the competitive dynamic between Google Wallet and ISIS, however – and to understand what impact this has on the future of NFC and potential revenue models – it is important to discuss the technology a bit further. As discussed in last week’s blog, NFC is simply a new hardware that allows two electronic devices to communicate – it is comparable to something like Bluetooth or RFID. Devices using NFC communicate to one another using a process called inductive coupling; basically, one device passes electricity through a metallic coil (basically an antenna) creating an electromagnetic field. If this field engages another metallic coil, a current is induced within the first coil. This current can then be translated into data.

What’s important to remember at this point is that NFC has many practical applications outside of simply payments. For instance, imagine you had an electronic business card saved on your phone. With NFC, you could transmit your business card to another NFC enabled phone by simply holding the phones next to each other, and then running an app to activate the transmission. Another application of the technology involves NFC tags. These tags are tiny stickers that store a small amount of information that can be read by NFC devices. So for example, an advertiser might make a promotional poster for a movie with an embedded tag. Interested patrons might then hover their smartphones over the poster and be automatically directed to a website showing the movie’s trailer. NFC tags can also be programmed and reprogrammed for personal use. For instance, an individual might program a tag so that it automatically sets his phone to silent mode whenever it is read.

WHO GETS TO SEE THE SE?

Making payments via NFC requires one additional piece of hardware, called the secure element (SE).  A secure element is a tiny microcontroller essential  for industry-standard payment protocols that typically comes embedded with the NFC antenna. No payments can be processed without it on any of the major networks (MasterCard, Visa, American Express, Discover). Its function is to store the encrypted payment card information that gets transmitted to a merchant’s NFC device – essentially, think of it as the virtual replacement to the magnetic strip on a credit card. Secure elements, as their name implies, are secure – multiple levels of protection and encryption exist within the microcontroller to prevent extraction and duplication of the payment card data inside. Additionally, SEs are separate from a phone’s operating system and hardware – only authorized programs like Google Wallet or ISIS are allowed to access the secure element, and only enough to initiate the transaction.

Secure elements are truly the place where the NFC battle is currently being fought. Partially, this is because secure elements are limited in the amount of data they can store – the original embedded SEs found on Nexus S handsets only have a capacity of 72kb of information. With such limited space, it becomes clear that whoever controls the Secure Element controls the available space within. ISIS hopes it can leverage its control over this virtual space to procure revenues [1]. Google Wallet originally started with a similar model, but in 2012 dropped issuer-specific payment credentials in favor of a single, prepaid account issued by Bancorp using the MasterCard network. This single pre-paid account draws funds as needed from customers’ existing credit cards, which are stored remotely on encrypted Google servers. This allows for a multitude of different credit cards to work with Google Wallet without Google having to negotiate individually with the over 8,000 issuers in the U.S.

NFC devices, and therefore secure elements, are typically placed in one of three places: the SIM card, embedded in the phone and on a removable SD card. The most widely used option today is the embedded solution, where NFC antennas and secure elements are baked onto the actual hardware of the smartphone. This also represents a middle ground solution between Google Wallet, who generally wants SEs to be open, and ISIS, who wants to keep the secure elements proprietary.

SECURE ELEMENTS & COMPETITION

In December of 2012, Verizon blocked the Google Wallet app from working on their customers phones. Users received an error message that stated “Unfortunately, Google Wallet is not available on your device or mobile network”. Google has since filed a complaint with the FCC and a formal decision has not yet been made.  Even without openly blocking Google Wallet, mobile carriers can still dissuade users from using the service, for instance, by not offering it on their Android app stores. Today, Google Wallet works officially on all NFC enabled Sprint phones, some US Cellular phones and two Virgin Mobile phones:

  • Samsung Nexus S 4G on Sprint
  • Samsung Galaxy Nexus on Sprint
  • Samsung Galaxy Nexus GSM/HSPA+
  • Samsung Galaxy Victory 4G LTE on Sprint and Virgin Mobile
  • Samsung Galaxy SIII on Sprint, MetroPCS, and US Cellular
  • Samsung Galaxy Axiom on US Cellular
  • LG Viper™ 4G LTE on Sprint
  • LG Optimus Elite™ on Sprint and Virgin Mobile
  • LG Nexus 4 GSM/HSPA+ (available for purchase on Google Play)
  • HTC EVO 4G LTE on Sprint

End users can sometimes, but not always, circumvent carrier controls by gaining root access to the phone operating system. Google Wallet unofficially works on AT&T Android phones and some T-Mobile Android phones, but not on any Verizon phone. Tellingly, Sprint has not deigned to block ISIS.

Despite all the legal battles, Google Wallet has an available “nuclear option” if it is not allowed to use the hardware secure elements on Verizon phones. Though GlobalPlatform – the not-for-profit that establishes protocols and guidelines for making NFC payments – has determined that secure elements are necessary for financial security, Google Wallet could simply use virtual secure elements stored on the cloud. A U.S. startup called SimplyTapp has been developing this approach since 2005, and it would completely divorce sensitive payment information from any hardware secure element on the phone. Would Google ever pursue this option? This is not clear – though they don’t currently have the formal support of AT&T, T-Mobile or Verizon, their carrier partner Sprint is still the third largest MNO in America. Opening up secure elements to the cloud would open up a Pandora’s Box – allowing competitors like Square or PayPal to flood the market for NFC apps, now no barrier exist to prevent them from accessing NFC.

FINANCIAL DETAILS

Google Wallet is in direct collaboration with Citi as the issuing bank, MasterCard as the payment network, and Sprint as the mobile carrier service. First Data acts as the card processor and handles authorizations. Additionally, Google Wallet has a licensing arrangement with Visa for their PayWave system. In 2012, Google Wallet expanded service to accept all major credit cards and include some Virgin Mobile Phones.

Google Wallet is accepted at any location which accepts MasterCard PayPass and Visa PayWave. 120,000 merchants nationwide accepted Google Wallet as of May 2011, and over 300,000 merchants accept it today.

NETWORK DETAILS

Also unlike ISIS, Google Wallet was designed as an open platform. Similar to Dwolla, the hope is that eventual developers can take the core API and cater it to individualized needs while still using the Google Wallet platform for NFC payments. However, this open platform idea is similarly developing and subject to change as no public API has yet been circulated.

WEAKNESSES

Google Wallet and ISIS both require collaboration between multiple parties to work effectively: credit card companies, mobile phone manufacturers, networks carriers, merchants and consumers. While Google Wallet has taken a versatile approach towards credit card companies, by essentially partnering with all of them, ISIS has the advantage in terms of phones themselves. In other words, consumers that want to use Google Wallet are restricted to a few models of Sprint and Virgin Mobile phones. ISIS users, on the other hand will have a larger selection of hardware they can turn to for NFC capability. This may force Google’s hand into adopting a revenue sharing model with carriers to stay active.

FINER POINTS

Can I use NFC to send money to friends (P2P)?

Currently, all the hardware exists for this to happen and the only factor missing is an app or platform that would facilitate this transaction. Additionally, issuing banks would have to be in agreement about how the money gets transferred and their share in the transaction. There have been no attempts of creating a platform for peer-to-peer from Google Wallet or ISIS.

Why not let the telecoms distribute NFC on their SIM cards?

For mobile network operators, the obvious choice would be to store secure elements on the SIM card. This would give them most proprietary control over the use of the secure element use and allow their customers to maintain their payment cards on their SIM when upgrading their handsets. However, because of difficulties in adapting current NFC technology to SIM cards, this option is not widespread.

Why not let individuals buy their own NFC-enabled SD cards?

Storing NFC technology on a SD card would be the most “open” option available and allow backwards compatibility with old smartphones. However, this option has its own difficulties – for instance, it might be a hassle for consumers to seek out the new technology and also requires them to have an open slot. Additionally, who would pay for the SD card; the consumer or the issuing bank? Because of these problems, the NFC on SD card solution has not widely been used either.

Are there other options for enabling NFC on one’s phone?

In January 2013, the company Incipio announced that they would release the “CashWRAP iPhone case”. In addition to protecting the iPhone 4/4s from dings and dents, the CashWRAP would allow purchasers to make NFC transactions using the ISIS platform. The case will retail at a price between $59 and $69 and will be available Spring 2013.


[1] As explained in last week’s blog, ISIS hopes to rent out this virtual space  on the Secure Element – at the cost of $5 per customer per year – to allow issuing banks to store their payment cards on these microcontrollers.

 

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