How does Google Wallet 2.0 work? In a nutshell:1) All payments will be made using a Pre-Paid Virtual MasterCard (VMC) issued by BanCorp Bank that, in turn, is linked to the user's preferred credit/debit card. All credentials for this VMC will be stored in the phone's Secure Element (SE), all other card credentials will be stored in the cloud. No need for Google to negotiate with issuers / networks to include them in the SE, as was the case with the first Google Wallet (GW) iteration.
Note: At the moment, there is one notable exception to this rule: Citi MasterCard, Google's first - and still only - banking partner. Citi MasterCard credentials are stored in the SE.2) Google is acting as 'merchant of record'. The merchant will authorize/settle transactions with Google - paying fees based on the use of a present pre-paid debit card. The VMC credentials will be sent via the MasterCard network to the issuing bank (BanCorp Bank). In turn, and in real-time, BanCorp will map the VMC to the user's preferred method of payment and will seek authorization with the card issuer - paying standard fees related to the chosen card, probably as Card Not Present (CNP). Basically, the VMC is used by Google/BanCorp as a directory entry to link to the user's 'actual' card. These are two back-to-back processes. The graph below illustrates this process - in a very simplified manner - using the example of AmEx as being the preferred method of payment.
3) The payment process may be a bit slower due to the need to perform these back-to-back processes. Google is probably making a loss with each payment given the difference between the fees they are charging to the merchant and the fees issuers are charging them.
4) Google/BanCorp have now full access to all payment information, making it extremely easy for them to work with merchants to develop loyalty programs and with consumers to organize their spending. I believe issuers still receive all (or most) of the transactional information and can apply rewards and protection programs to the transactions, although Google makes it very clear that it is up to the issuer to decide how to treat these transactions and whether or not rewards and protections apply.
5) GW can be implemented using an NFC-enabled phone but also just a plastic card (with mag stripe, contact or contactless technology) or even an NFC sticker. These alternative options would provide a much poorer experience and less security but they may be a way to get consumers comfortable with using Google as a payment method (this is precisely what PayPal is trying to do through their partnership with Discover). In any case, each transaction could always be instantly recorded in the cloud and immediately sent to the user's phone.
6) You can store a number of payment methods in your GW account but only have one linked to the VMC at any given time, meaning that you cannot change the card you are using to pay at the till. This seems to be a bit limiting... But it could easily be changed to, either have a set of rules to determine which card to use based on merchant and payment amount or to be able to choose the specific card you want to use at the till.
7) Google's approach for the 2.0 version of its wallet differs greatly from the approach it took when it developed the first version. At the same time, this approach seems to resemble that of PayPal - although with a different implementation - or, another way of seeing it, Google CheckOut with NFC capability.
How does Google Wallet 2.0 'stack up' against the criteria listed at the beginning of this series (click here to review the list)?
Reliability, Transaction Speed and Security:
It is an NFC-based solution, connecting the merchant (or Google, as the merchant of record) to the banks through the traditional processors and card networks. This means the highest standards in reliability, speed and security. Because in this case we have two back-to-back transactions (between the merchant and BanCorp and then between BanCorp and the actual issuer), speed may suffer but I am assuming not enough to make it noticeable.
Ease of Use:
Again, as an NFC solution, use at point of sale is extremely simple - just tap-and-go. The interface is also simple and intuitive enough.
Wallet Functionality:
From a functionality perspective, it seems to be a bit limited. This could be easily changed but, at the moment, only one card can be linked to the VMC. This means that, although you may have all your cards stored with Google, you can only use one at the store. You need to log into your account online to change your preferred method of payment.
Also, given the limited involvement banks currently have with this solution, it is difficult for them to use the wallet to create a more direct link with their customers.
Acceptance:
There is a limited number of NFC-enabled POS in the U.S. A much lower number than in Europe or other geographies. This will change in April 2013, once acquirer processors and sub-processor service providers will be required to support merchant acceptance of EMV chip transactions by Visa and all other card networks. This mandate will greatly accelerate migration of POS to provide support to, at a minimum, EMV contact cards and, in most cases, EMV contactless and NFC-enabled devices.
Device Availability:
At the moment, GW only works on a few devices on Sprint's network. This is an extremely limiting factor. Given that GW requires an NFC-enabled phone with access to its SE, there may be a long road to travel to good device availability.
Value-add Apps:
In theory, GW can support all types of value-add apps to enrich the user's experience and make the wallet truly valuable. Unfortunately, at the moment, there are no (or very few) apps available.
Food for Thought
Considering that PayPal, Visa and MasterCard (among others) are already also providing, or plan to provide, other payment services such as P2P or remittances (we will discuss these capabilities in detail when reviewing each solution), shouldn't Google also take a stance in those areas?
Edit (08/30/2012) - It hasn't even been a week since I posted this blog and I already need to make an update! Google has spoken about the possibility of including P2P payments in its GW.