How Apple Pay and Google Wallet are both on the cusp of success

I've been running through this idea for a while now, and the argument has taken a number of different forms before arriving at what you're reading right now. At first, I thought that Apple might have something special with Apple Pay because of the way Apple always tends to be able to make business deals where Google can't. The thought was likely very much influenced by the recent news that Android Silver may not happen. Apple has a history of making deals where others couldn't, mostly because of the power that Apple wields, and the high value placed on each Apple user. Google has a history of not being able to make those deals, either because Google pushes too hard with its own demands and doesn't compromise enough, because Google has been a very disruptive force for many markets, or simply because partners don't see the value in whatever Google is proposing. 

Assuming the news is true that the Android Silver program has fallen through, it would mark one more example in that history. With Android Silver, Google apparently wanted to push the Google Android experience into carrier stores and be able to offer customers better support and faster updates. The value is clear for Google, but the idea makes far less sense when you consider it from the point of view of a carrier or manufacturer. Samsung could describe how TouchWiz and the software it adds and maybe convince users of value there, but why would Verizon agree to such a plan? 

Undoubtedly, that news influenced how I thought about the new media creation of Apple Pay vs Google Wallet. There was, I realized, other problem with my original thinking though: Apple hasn't really made any special partnerships for Apple Pay; Apple is simply better at selling a product and an idea. One of Apple's main slides when announcing Pay was the one that touted you could use the payment method in over 220,000 stores. The secret there is that almost all of those same stores have been set up to accept Google Wallet payments for years now. Of course, very few Android users knew about it, which is where the real problem is found. 

Google Wallet was first shown off in a somewhat odd way. Rather than announcing the new feature at Google I/O, or with the release of a new device, as you might expect. Google held a special event in New York City on May 26, 2011 specifically to announce Google Wallet and Google Offers. There were a number of issues with the launch of Google Wallet. 

The first issue was that although Google announced the product in May of 2011, but at first, it was only available on one handset, and even worse, that one handset was a Sprint device. Google Wallet didn't actually make the app widely available to users until September. And, even once the app was made available, users quickly hit the real problem with Google Wallet: support. When the service first launched in May, it was available on one device - the Google Nexus S on Sprint - and only supported one credit card type - Citi MasterCard. By the time the wider launch came in September, the device compatibility had grown a bit, but Google would have a running theme for a while of having trouble demonstrating the value of the product. 

The one bright spot was that despite the limitations of Google Wallet, it was initially compatible with MasterCard's PayPass system, which was available at the time in 300,000 stores in the U.S. (which you may notice is more than Apple's 220,000). Google was also able to strike a deal with Visa for payWave compatibility when Wallet expanded in September of 2011. Unfortunately, the promise of "300,000" stores turned out to be somewhat misleading, because that number likely included the thousands of Walgreen's, 7-Eleven, and other pharmacy/convenience stores that supported NFC. If you lived in Manhattan, where there is a Duane Reade on every corner, Google Wallet probably sounded pretty nice and worked quite well for you. If not, the usefulness of the app was limited. 

It wasn't until August of 2012 that Google was able to finish hammering out deals (or so we thought) to get the other major credit card companies on board. The addition of Visa, Discover, and American Express came when Google started storing credit info in the cloud and only putting virtual numbers on the device itself. The change made the app much more useful (although American Express claimed it never agreed to be part of Google Wallet), but the issue of device compatibility still remained. In August 2012, Google Wallet was only available on 6 devices - the Galaxy Nexus (except for the Verizon model), Nexus 7, Galaxy S III, HTC Evo 4G, LG Viper, and LG Optimus. 

Even with the limited availability, Google Wallet saw some movement, and it was reported that usage doubled just one month after support for all major credit and debit cards was added. Of course, as we note when talking about Windows Phone market share stats, "doubling" a number is much easier when it is quite small to start. Unfortunately, even as usage was picking up, Google ran into problems with carriers. Verizon refused to allow Google Wallet on its devices because the "secure element" required wasn't available on all Verizon handsets. (This rationale did not eventually stop Verizon from launching its own NFC payment system, which was called Isis (now Softcard), on some, but not all Verizon handsets.) 

It also didn't help that just after that, Samsung announced a deal with Visa which resulted in Visa's payWave app coming pre-installed and taking precedent over Google Wallet on new Samsung devices. Given the market share that Samsung held (and still holds) in the Android world, combined with the fact that Samsung devices were, by far, the most popular devices that even supported Google Wallet; this was bad news for Google's payment system. 

So, for the first two years of Google Wallet's life, it faced a lack of compatibility with devices, slow integration of credit and debit cards, no support from carriers, and only perfunctory support from manufacturers. All of this meant that, sure, Google Wallet was on quite a lot of Android devices, but user awareness was very low. Manufacturers obviously weren't highlighting the feature, Google has never been all that good with marketing, and none of that even touches on the fact that retailers were still slow to adopt NFC payment systems. Today, it is estimated that only 10% of retailers in the U.S. are equipped to accept NFC payments, so Google Wallet was trying to build the ecosystem, and that didn't work so well. 

All of this led to Google making a bit of a pivot with Wallet last September, almost exactly two years from Wallet's original wider release, which saw the app move more into the PayPal world of sending and receiving money, and the digital wallet world of loyalty cards and gift cards, while pushing NFC payments to the back burner. Google has even caused itself more problems with the update, because it now requires Android 4.4 for NFC payments. Android 4.4 is only on 25% of devices right now, but it is likely on a higher proportion of high-end devices in the U.S.. It is still another limitation for users though. 

You can argue all you want that Google helped to build the market, or that Android got there first, but none of that really matters. Being first to market has never been as important as being the first to capture the attention of consumers. The fact that it was a Russian man who was the first human in space doesn't really carry much weight anymore, but the name of the first man to step foot on the moon? No one is going to forget Neil Armstrong or his words for a long, long time. Most people know that Jackie Robinson broke the MLB color barrier, but how many people can name the men who did the same in other major sports? How many people remember the first MP3 player on the market? Not many, but everyone knows the iPod. Google had an NFC payment system on some devices for over three years now, but Apple may well end up winning the awareness war here as well. And, even if that does happen, it would be a good thing for Google Wallet. 

First of all, let's take a look at why Apple Pay may succeed where Google has struggled. The way I see it, Apple has three distinct advantages over Google in this effort:

This one is obvious. Google had to struggle and fight to get manufacturers to adopt NFC. After that Google had to worry about carrier support, and even keeping its own manufacturers (aka Samsung) on board with Google Wallet. Apple doesn't have these issues. Both the iPhone 6 and iPhone 6 Plus support NFC payments natively, and all future iPhones will undoubtedly do the same. We don't know for sure yet, but Apple Pay may also be part of the new iPads, which are due to be announced in October (and Apple Pay is planned to launch in October). 

Interestingly, Apple also has a plan to allow users with older iPhones to get into the Apple Pay world - the Apple Watch. A lesser publicized bit of information that you can find on the Apple Pay website is that it will work through the Apple Watch when using either of the new iPhones; but, it will also work with the iPhone 5, 5s, and 5c. This is a smart way to expand the compatibility of the feature, and maybe push more Apple Watch units, but it does cause some issues related to the second advantage Apple has over Google in mobile payments:

Overall, this is a much smaller advantage, but a crucial one in terms of public perception. In terms of security, Apple doesn't have all that much over Google, both Apple Pay and Google Wallet use virtual credit card numbers, so the retailer doesn't get your real card number. And, the fewer places that have your real credit card number on file, the less chance that a system hack will put you in danger (like the recent troubles at Home Depot.) The slight advantage (depending on perspective) Apple has here is that Apple doesn't store your credit card details on its servers (at least not for Apple Pay, your iTunes account will still have a stored credit card on Apple servers), it only exists on your phone. If you lose your phone, you can remotely wipe it. Google does save your credit card details on its servers, but it also offers the same remote wipe features if you lose your phone. 

If you are worried about privacy, Apple also notes that it will not keep a log of your transactions on its servers. You will have a log of your recent purchases in the Passbook app, but only you have access to that. Google does keep a log of your transactions on its servers, but it is up to you if that bothers you or not. There are certainly privacy concerns for some, but I'm personally of the mind that it doesn't matter. It makes it easier for me to keep track of transactions, and if Google scrapes the data, it is only to offer be tailored ads (which I ignore) or relevant offers (which save me money). If Google servers are hacked (which is relatively unlikely), someone would find out the annoying amount I spend on Candy Crush, but they aren't getting any personally identifiable data, so it doesn't bother me. 

The last piece is likely the biggest one: Touch ID. Touch ID is a weird thing when talking about security, because for the most part, it makes transactions safer and faster, but it isn't perfect. Touch ID had its issues last year, but early reports say that Apple has worked out the kinks. The addition of Touch ID security to Apple Pay is one that makes retailers extremely happy though. A large part of credit card fees that are charged to retailers go to fund the fraud units of those credit cards. Touch ID should cut down on fraud, which is a big reason why Apple has been able to negotiate lower transaction fees with credit card companies and banks. This means lower costs for merchants, and possibly more willingness to promote Apple Pay. 

The one potential issue with Touch ID is with the Apple Watch. When you are using the Apple Watch to pay for something, the transaction is no longer authenticated with Touch ID. This has been done partially to speed up the interaction, but also so Apple could add in compatibility for the older iPhones that don't have Touch ID sensors. When using the Apple Watch, you just double-tap the button next to the digital crown and touch your Watch to the NFC receiver. Presumably, it would be far less likely for you to lose both your Watch and iPhone at the same time, but it does still remove Touch ID from the equation, which could be troubling for those with security concerns. 

It probably doesn't even need saying, but possibly the biggest advantage Apple Pay will have over Google Wallet is with marketing alone. Apple has one of the most successful marketing teams on the planet. It is nearly impossible to watch TV for more than an hour without seeing an Apple commercial, and Apple products dominate TV news to an almost obscene degree. Apple flat out knows how to sell a product. Whatever your personal feelings about those products specifically, Apple's marketing cannot be argued. 

A direct result of that marketing prowess is the pervasive idea that the Apple brand is a premium brand. Apple devices are seen both as functional products, but also as status symbols and fashion accessories. Because of that, and the fact that Apple products cost more, the average Apple user tends to be more well-off. While the gap is shrinking, Apple users spend more on apps than Android users, and every year we see studies claiming that Apple users spend more during the holidays than Android users. 

Retailers are fully aware of this, and it gives Apple surprising power in the Apple Pay deals. The pitch from Apple would be fairly straightforward: Apple users spend more money, so it would benefit retailers to promote Apple Pay to customers. Add in the fact that Apple is taking less in fees, and suddenly, you have a very attractive product on your hands. A product attractive enough that retailers might be more willing to put up "Apple Pay accepted here" signs, where you wouldn't have seen the same for Google Wallet. 

Here's the thing though: Apple's marketing beast that will be behind Apple Pay will likely end up helping out Google Wallet as well. Remember, Apple Pay is accepted at stores that have already been accepting Google Wallet payments for a while now. Apple is not creating a new market, but entering one that has already been established. The real problem is with consumer awareness. Whenever an Apple user says, "Wow, Apple Pay is cool," an Android user that may not have known about Wallet will have an opportunity to learn about it. 

I will be keeping an eye on the Google search suggestions after Apple Pay comes out, because I have a sneaking suspicion that there will be a rise in searches of "Apple Pay for Android", and derivations thereof. Once people see the value in paying with their phone, they'll want to learn more, but not necessarily want to buy a new device; so, people will learn about Google Wallet, and there will likely be a rise in Google Wallet usage as a result. 

It is all a matter of awareness and acceptance of the phone as a payment method. The idea of using your phone to pay for something is still on the fringe. There are even people who still refuse to use their credit cards on the Internet. People are always slow to adopt new technologies when the value isn't blatant. The last time I used my phone to pay for something in a store, the clerk was so amazed that he called over a bunch of people to watch, and intentionally screwed up my payment, so I had to tap my Nexus to the terminal about 5 or 6 times to complete the purchase. That's not a good interaction, and I'll be very happy to see phone payments become more commonplace. 

Of course, having lived in Japan for a couple years, where NFC is in every phone, and has far more uses than just payments, I've been looking forward to NFC catching on for a while. There is a lot more potential for NFC beyond payments, but we here in the U.S. appear to be laser-focused on payments alone and ignoring the other uses. It can replace your public transit pass, membership/loyalty cards, and can be used for tons of other things with NFC tags (which the iPhone won't support at first). 

Still, in America, consumers still need to get used to the idea of phone payments, and the Apple marketing juggernaut will help push that along. 

But, Apple will have a lot of help in getting consumers on board, because as I mentioned right in the title, Apple Pay's success could end up being a simple matter of timing. It is no mistake that Apple is getting in the game right now, because pretty soon, all contactless-payment solutions are going to see a boost. There are quite a lot of Android devices in the wild that support Google Wallet, and many more merchants that accept the payments now than when Wallet first launched, but it has been a long haul to get here. NFC payment systems have been much more mature internationally than in the U.S., and Google was hoping to build the Google Wallet user base as the NFC rollout in the U.S. was happening. That worked to an extent, but had plenty of issues to deal with as well, as detailed above. Apple Pay isn't being released so that Apple can take over the NFC payment market this year. It is being released because Apple wants one year to iron out any issues before the real change happens.

By October of 2015, Mastercard and Visa will be changing all of their payment terminals in the U.S. to those that are compatible with EMV. This plan was put in place back in 2012. You may not know the name, but you likely know the product itself. EMV (named for EuroPay, MasterCard, and Visa, who created the standard) is that little gold chip that you've been seeing in your credit cards for the past ten years, but have never had much use. That EMV chip works the same way as Apple Pay and Google Wallet, which is called the "chip-and-PIN" system, where the chip will generate a unique code for each transaction rather than transmitting your credit card number. The transaction is then authenticated by a PIN (or Touch ID) rather than a signature. 

EMV has been the standard in Europe and other countries for a while now, and it is much more secure than the "swipe-and-sign" method used in the U.S. right now. As mentioned before, a big reason why Apple Pay may succeed is because of its security, which would cut down on fraud. EMV will also cut down on fraud, and the hope is that it will then save banks money because of that. Swipe-and-sign won't go away after October 2015, but any merchants still using those systems will take responsibility for fraud, not the banks, so there is good incentive for merchants to switch out their payment terminals. 

This switch in terminals will be huge for both Apple Pay and Google Wallet. Right now, it is estimated that only about 10% of retailers have EMV-compatible terminals, a number which usually goes hand-in-hand with NFC payments. This changeover will cause that number to grow quite a lot by late next year, and that is exactly why Apple has jumped on the mobile payments train right now. Apple has always been waiting for the mobile payment ecosystem to mature, and that ecosystem is about to hit a major growth spurt. Google tried to push the change, but couldn't do it. Now, Mastercard and Visa are essentially mandating the change, and that makes right now the perfect time to offer a mobile payment solution. 

Right now, both Apple Pay and Google Wallet's NFC payments are only available in the U.S., but that will undoubtedly change as well. Europe has long supported EMV, but that hasn't meant supporting NFC the way it will in the U.S.. But, Mastercard has promised that all point-of-sale terminals in Europe will support NFC payments by 2020. 

We are undoubtedly coming up to the tipping point with NFC payments. The infrastructure will see a massive change in retail outlets over the next year; and, with the addition of Apple Pay, the vast majority of mobile phones will support NFC payments going forward. IHS said that in 2013, 254 million of the 780 million Android smartphones shipped globally were NFC-enabled. Devices that are NFC-enabled are highly skewed to the high-end markets, where contactless payments will be adopted first. Android and iOS combined for 94% of the global smartphone market in 2013, and Apple held about 44% of the U.S. smartphone shipments. So, Apple Pay and the new iPhone 6 and 6 Plus are set to cause a spike in the number of devices that support mobile payments, at the same time as the retail infrastructure is changing over. 

Apple Pay does have a couple of advantages, but Google has been at this much longer. Apple should be able to raise awareness in a way that Google has failed to do, but Android is still going to dominate market share for devices. It should be interesting to see the statistics about which system gets used more often, because it would be telling in terms of gauging the old stereotypes about the Apple user base, and because I would very much expect to see a bump in Google Wallet use after Apple Pay is released. At the end of the day though, NFC payments are going to be the winner here, regardless of if you use Apple Pay or Google Wallet; and, that should mean faster and more secure transactions for everyone. Just get ready to leave your wallet at home, and be constantly paranoid about losing your phone.

reference: EMV adoption, NFC-enabled cellphone stats