Google Inc. Undercuts Apple Inc. in Mobile Payments (but Not Intentionally)

By Leo

Google won't get a cut of credit card providers' transaction fees on its new mobile payment platform, Android Pay, according toa recent Wall Street Journal report. That dramatically undercuts Apple Pay, which charges a transaction fee of 0.15% for credit card purchases.

Source: Google/Softcard

Continue Reading Below

Undercutting rivals with free products might sound like a textbook Google strategy, but Google actually wanted similar transaction fees as Apple. Unfortunately, Visa and Mastercard recently adopted a "tokenization" card security system which prevents payment services from charging fees to card providers. Apple secured its three-year deal for Apple Pay's fees before that system was in place.

Since Google was late to the party, it now has to use Android Pay as an ecosystem play rather than a revenue one. But now that Google has the cheaper system, could it also gain ground against Apple in the mobile payments market?

Google's payments strategyBack in 2011, Google introduced Google Wallet, a PayPal-like service for storing debit cards, credit cards, loyalty cards, and gift cards.

Google Wallet. Source: Google

Unfortunately, the U.S.-only service faced fierce resistance from Softcard, a competing platform backed by AT&T, Verizon, and T-Mobile U.S.Those carriers blocked Wallet on most of their handsets and crippled the fledgling service. Google eventually circumvented that block with Android 4.4 in late 2013, then acquired Softcard earlier this year to integrate its technology with Android Pay.

Yet that only solved the problems of hardware compatibility and carrier backing. Another major issue was privacy. When Google asked banks to support Wallet, it requested that data on purchases and other personal information be sent back to Google for targeted ads. Citi agreed to Google's terms, but many other banks refused tomine customer data for Google.

Enter Android Pay and Samsung PayGoogle recently introduced Android Pay, which confused many people by overlapping Google Wallet's features. Both platforms have a "tap to pay" feature for NFC, and both are linked to credit and loyalty cards. But whereas Wallet required a PIN code to use the NFC feature, Android Pay simply requires a phone to be unlocked. To address security issues, Android M will add native support for fingerprint scans. Meanwhile, Wallet will stick around as a peer-to-peer and online payments system for websites.

Android Pay. Source: Google

However, Samsung is getting ready to launch its own payments platform, Samsung Pay, on its Android devices. Samsung Pay reportedly won't charge transaction fees within South Korea, but it's unclear if it will do the same in other markets.

Samsung Pay represents a much bigger threat to Android Pay than Apple Pay, since Samsung handsets account for nearly a third of all Android devices worldwide, according to IDC. Samsung Pay will work at over 30 million retail locations, thanks to its acquisition of mobile payments start-up LoopPay, compared to 700,000 locations for Android Pay.

Apple's payments strategyCompared to Google's clunky strategy for mobile payments, Apple's strategy is more streamlined. Apple focuses on three key facts: it controlsover 40% of the U.S. smartphone market, its new devices have fingerprint scanners, and that it doesn't plan to use Apple Pay to mine data.

Apple Pay. Source: Apple

As a result, 2,500 banks agreed to Apple's terms for transaction fees, and 700,000 retail locations now accept Apple Pay. Google might think that banks could drop their transaction fee deal after it expires, but if Apple Pay catches on, Apple simply needs to highlight those three facts again to secure a renewal.

Apple also has its own digital wallet app, known as Passbook. Like Google Wallet, Passbook stores digital versions of credit and loyalty cards. Apple recently announced that it would integrate Passbook's saved cards into Apple Pay, and that it would rebrand the main Passbook app as Wallet.

An unproven marketAll these tech giants are scrambling to offer mobile payments solutions, but the market is a still an unproven one.

Apple recently told Reuters that "about half" of the top 100 merchants will accept Apple Pay by the end of the year. However, Reuters surveyed 98 of the largest brick-and-mortar retailers in the U.S., and found that only 4% planned to add support by the end of the year. Another survey from InfoScout in March found that 85% of iPhone 6 owners haven't even touched Apple Pay. It's unclear exactly how much revenue Apple Pay will generate through transaction fees, but BGC Partners analyst Colin Gillis stated that it wouldn't "be a material revenue stream on its own anytime soon."

However, U.S. mobile payments might rise from $13 billion spent in 2012 to $90 billion by 2017, according to Forrester Research. If that forecast is accurate, services like Android Pay, Apple Pay, and Samsung Pay could eventually become new pillars of growth for these aging tech giants.

The article Google Inc. Undercuts Apple Inc. in Mobile Payments (but Not Intentionally) originally appeared on

Leo Sun owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple, Google (A shares), Google (C shares), MasterCard, Verizon Communications, and Visa. The Motley Fool owns shares of Apple, Citigroup Inc, Google (A shares), Google (C shares), MasterCard, and Visa. 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.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.