Google may be set to leapfrog Apple in mobile payments with Android Pay

A number of signs point toward Google unveiling a broad new mobile payments platform called Android Pay at its I/O developer conference Thursday in San Francisco. The platform is likely to integrate tightly with Google’s Android mobile operating system, and it may exceed the functionality of its chief rival, Apple Pay, in some ways.

Google’s first stab at mobile payments, Google Wallet, was plagued with all kinds of problems. Merchants never really bought into it, and phone carriers prevented the technology from getting onto a lot of phones. Consumers found the experience a little bit clunky.

But Google has done some smart things in the past year, driven at least in part by Apple Pay’s initial success.

The Softcard factor

Above: Promotional graphic from Softcard (formerly ISIS).

Image Credit: Softcard

Not too long ago Google bought Softcard, a failed mobile payments platform assembled by a consortium of phone companies. The companies (namely AT&T, Verizon, and T-Mobile) thought that because they were the main distribution channel for phones, they could dictate what mobile payment app would ship with the devices.

By acquiring Softcard Google bought a way to get Android Pay onto phones, because the phone companies no longer had an incentive to block it. They were out of the mobile payments business.

Google also got some advanced mobile payments technology in the deal. Softcard, it turns out, had done a lot of work on how to handle loyalty programs through a mobile payments platform. It had developed a set of specs, and even worked to convince the point-of-sale equipment manufacturers to adopt the specs.

Fingerprint reader vs. friction

This was all happening as Google was planning some big changes to Android itself. One of the biggest and most believable rumors about the next version of Android, now dubbed Android M, is that it will bring fingerprint reader support down to the operating system level. (Some Android phones already have fingerprint readers, but the phone OEM has to bake in its own software to control it.)

Above: Apple introduced its Touch ID fingerprint reader in 2013.

That would allow fingerprint authentication to become more tightly integrated with a mobile payments system. It would allow fingerprint readers to be the main authentication mechanism for Android Pay. And it would eventually bring fingerprint reader support to lots more phones.

One of the reasons Google Wallet failed is that there was just too much friction in the user experience, said mobile payments expert John Haro, CTO of the mobile rewards company Vibes. You have to wake up your phone and enter a PIN before starting a payment, and in many cases you have to answer further questions to complete the transaction.

With a fingerprint reader, the Android Pay experience in the retail store setting would be much like that of Apple Pay. You would rest your finger on the fingerprint reader, hold the phone near the point-of-sale terminal, and that’s it.

“I’ve always said that in order for people to adopt mobile payments, the experience is going to have to be easier than pulling out your wallet and grabbing a credit card,” Haro said. Apple, he said, was the first to accomplish that.

Loyalty programs go mobile

But payments aren’t everything. Rewards programs are everywhere, and they need to be a big part of mobile payments too.

A New York Times article today said that both Apple Pay and Android Pay will soon add loyalty programs to their mobile wallets. This would allow consumers to redeem and track rewards credits using a contactless NFC (near field communication) connection to the point of sale device. Google has a chance to bring this to market first.

Above: Verifone point-of-sale terminal that supports NFC-based mobile payments, loyalty programs (see the screen), and EMV cards.

Image Credit: Verifone

Today, loyalty cards are clunky on Apple Pay. You can store a rewards card in PassBook, but that card can’t communicate data directly to the merchant’s point-of-sale system when the phone is held near it. The NFC chip inside the phone can be used only for payments, not rewards. Instead, the merchant has to scan the image of the card in Passbook in order to apply any discounts to the sale.

Many merchants were worried about Apple Pay because they had grown accustomed to identifying recurrent customers via their credit card numbers. If a customer starts paying with Apple Pay, they lose that. That’s because Apple Pay creates a different dummy card number for every transaction. So the merchant no longer can track things like the frequency of the customer’s store visits.

With the mobile payments systems incorporating loyalty cards, merchants have their customer identifier back: It’s the customer’s loyalty card number. The cashier no longer has to scan the customer’s phone screen; the rewards data is transmitted wirelessly through the NFC card and rewards credits are applied to the sale automatically.

Pulling it all together

By bringing in the ease of the fingerprint reader and integrating the rewards card, Google will have removed several friction points from the mobile payment process. And it will have one-upped Apple, at least for the time being.

Tomorrow morning at Google I/O we may see all these different pieces — the Softcard technology, fingerprint support in Android, Google Wallet, and the NFC chip — come together in one coherent and compelling mobile payments story under the name “Android Pay.”

If that happens, I expect to see a lot more phones shipping with Android Pay baked in, and a lot more Android phones with fingerprint readers built on.

Since there are more Android phones in the wild than Apple ones, things could get interesting in the mobile payments space.