Is NFC killing Google Wallet?

Google may have backed the wrong horse when it decided to tie its Google Wallet payment app to the short-range wireless near field communications technology.

Google Wallet, Google's mobile payment, has been slow to gain traction.

Google Wallet is turning one, but the application that was supposed to transform the smartphone into a wallet and revolutionize how consumers pay for things has barely gotten off the ground.

Why? The reason may be that Google has bet on the wrong technology: NFC.

A year ago, Google execs, along with its partners MasterCard, Citibank, and Sprint, took the stage in New York City to show off the future of payments. No longer would people have to overload their wallets with cards and receipts. Google's plan was to virtualize it all.

Through an application for its Android smartphones, Google promised a world in which consumers could leave their bulky George Castanza wallets at home and instead load all their credit cards, loyalty cards, gift cards, and even some day their driver's licenses into a so-called digital wallet that stored all this critical information on a smartphone.

Using a very short range and secure wireless technology called near field communications, or NFC, consumers could pay for things simply by tapping their smartphone onto a terminal, which reads a user's credit card, coupon, or loyalty card information.

But a year has passed since Google first introduced this new application. And even though it's made some progress in signing up new retail partners, the company still hasn't managed to scare up additional credit card, bank, or carrier partners.

Google Wallet still only works with one credit card and bank combination: Citibank MasterCard. And the only major carrier where Google Wallet phones can be found is Sprint Nextel. (Virgin Mobile, one of Sprint's prepaid brands will also soon offer a Google Wallet device.)

What this means for potential Google Wallet users is that the only credit card you can add to your "digital wallet" is a Citibank MasterCard. If you don't have a Citibank MasterCard, you can still use the wallet, but you have to load money on Google's prepaid card. And because Sprint is the only carrier supporting Google Wallet, it means that users must be Sprint (or Virgin Mobile) subscribers to use the app. The only exception is if they buy the unlocked version of the Nexus S, which can be used on GSM carriers, such as AT&T.

Blame it on NFC
So what went wrong? One reason the service may not have gotten much traction is because it relies on the NFC tap-to-pay technology. While the technology itself has been around for a while and works fine, the problem with using it for payments is that it requires a broad ecosystem to get it off the ground.

First there's a hardware problem. Devices need to be equipped with tiny NFC chips. And terminals at the point of sale must also be equipped to read the information from the NFC chips installed in devices.

The second big problem is that there are still business issues centering around who controls the customer via the NFC technology that's embedded in the device.

"The biggest problem with NFC payments is a political one," said Yossi Yarkoni, founder and CEO of a startup mobile payment company based in Israel called Digimo. "The question comes down to: 'Who owns the customer?'"

Digimo has developed a mobile payment system that uses QR scanning technology instead of NFC. Yarkoni said it is this fundamental question about who owns the secure element that has held up the deployment of NFC-based mobile payments, such as Google Wallet.

"Why should Apple or Samsung bother putting NFC in devices if they simply hand over that customer relationship to others?" he said. "Everyone in the ecosystem wants a piece of this action."

As a result, fewer than 1 percent of the phones sold today have NFC chips embedded. But Google says it's making progress on the device front.

When Google Wallet first launched, the only device that offered the app was the Google-branded Samsung Galaxy Nexus S. Now there are a total of six devices that support NFC and the Google Wallet app. Five of these devices were announced just recently.

Here's a quick list:

  • Sprint Galaxy Nexus, Unlocked Galaxy Nexus
  • LG Viper on Sprint
  • LG Optimus Elite on Sprint
  • LG Optimus Elite on Virgin Mobile
  • Nexus S on Sprint

But experts say more devices are needed to make Google Wallet and other NFC-based mobile payment solutions successful, especially since companies, such as PayPal, are developing solutions that don't require NFC or any other specialized hardware.

"NFC-based mobile wallet plays will be disadvantaged in the short-term due to lack of hardware," said Linda Barrabee, an analyst covering payments for NPD Group. "This potentially gives PayPal, among others, some running room."

Alternatives to NFC
PayPal, which had been experimenting with NFC payments last year, ditched the short-range wireless technology when it launched its in-store mobile payment solution. Instead, the company has launched a mobile payment app that only requires users to type in a PIN to access their PayPal accounts. So far, it has deployed the service at more than 2,000 Home Depots around the U.S. And it announced on Thursday that it's adding another 15 retailers.

The new retailers include, Abercrombie & Fitch, Advance Auto Parts, Aeropostale, American Eagle Outfitters, Barnes & Noble, Foot Locker, Guitar Center, Jamba Juice, JC Penney, Jos. A. Bank Clothiers, Nine West, Office Depot, Rooms To Go, Tiger Direct, and Toys "R" Us.

PayPal's CEO John Donahoe said on the company's second-quarter earnings call that he doesn't see NFC ever making a splash in the market, because it doesn't offer consumers any real value.

"When is it (NFC) going to be ready? Never," he said. "I think other technology solutions, like what PayPal is doing where you pay hands-free with a mobile number and PIN, provide compelling consumer experiences that don't require the actual use of an NFC technology."

PayPal spokesman Anuj Nayar elaborated on this point in an interview with CNET.

"History has shown that unless a new technology saves people time or money, it won't reach mass adoption," he said. "NFC is a technology in search of a problem. Tapping a phone against a reader is no faster than swiping a credit card. In fact, it can take longer."

It's this ecosystem that is holding back NFC. And it's not just strictly about whether handset makers want to add NFC to their devices. The ecosystem is largely controlled by wireless operators. And so far, Google has also not gained much support there either.

Even when a device supports NFC, some operators have refused to enable the Google Wallet app on their networks. For example, Verizon Wireless disabled the Google Wallet functionality on its version of the Galaxy Nexus, even though the hardware supported it.

One reason why wireless operators haven't signed onto Google Wallet is because three of the four major wireless operators in the market -- AT&T, Verizon Wireless and T-Mobile USA -- are involved in a joint venture that's developing its own digital wallet. The joint venture, called Isis, is currently being tested in two markets: Austin and Salt Lake City. It's supposed to launch later this year.

But even Isis, which has support from wireless carriers and has signed up several credit card companies, has also been slow in getting off the ground. Part of the issue is that Isis also relies NFC technology as a way to authenticate payment.

It's this uncertainty around NFC that has caused other companies looking to break into the mobile payment to put NFC-based solutions on the back burner. For example, MasterCard, which is Google's partner on Google Wallet, did not include NFC in its own recently announced digital wallet.

Instead of focusing on the point of sale in physical stores, MasterCard has improved the experience of simply buying things from a mobile phone. In other words, the company has streamlined the interface so that consumers can buy things from a mobile Web site with a single click.

"NFC may become really important in the future," Ed Olebe, head of PayPass Wallet services for MasterCard. "So we are waiting to see how the industry works out its issues. But given there is a pressing problem today with commerce on a phone, we wanted to address that issue."

 

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