How will Google Compete in Payments?

In a recent post Google Takes a Bite of the Apple a comparison is made between the payment system subscription pricing model of Apple iTunes at a 30% fee and Google’s announcement of its One Pass at a 10% fee on the Android platform. The difference in the fee structure is attributed to the built in user base - Apple has 160 million existing iTunes users ready to go on its platform which the start up Google platform can not offer.

Facebook also charges a 30% fee for using Facebook Credits (with 500+ million users). So in this alternative payment space it appears that 30% is the top end regardless of number of users. Of course to buy Facebook Credits people would use PayPal. Wouldn’t it be better to simply use PayPal and skip Facebook Credits? Users would skip a currency conversion step and publishers/developers would get a lower rate. PayPal's published micropayments pricing of 5% + $0.05 applies to transactions less than $12 (by the way somewhere on the internet I read that PayPal claims over 100 million accounts). For easy math, let’s take a look at the various subscription pricing models on a $10 transaction: at 30% = $3; at 10% = $1; at 5% + $0.05 = 55¢.

And this leads me to wonder. According to Visa, they have approximately 665 million credit and debit cards in circulation in the US. The Visa small ticket debit Interchange is 1.55% + $0.04. On the same $10, that’s only 20¢. Add dues, assessments, processing network fees and merchant service costs and let’s calculate the all-in costs at 32¢. Visa has the most users and lower acceptance costs (and this is before Durbin’s government Interchange regulation).

But wait, $10 is probably on the high end. So let’s do the same math using a $1 transaction: At 30% = $0.30; at 10% = $0.10; at 5% + $0.05 = 0.10. And a Visa debit transaction all-in at approximately $0.15. So we can begin to imagine on different size transactions how all these payment platforms compare (although consumers and merchants don’t really have a choice when using one of these proprietary platforms from Apple or Facebook). Which leads me to question one of the post’s conclusions that the “consumer has other options.”

Back to Google and the question of how they can establish One Pass billing relationships and grow their account base. As the post points out, Google offers a lower fee to incent the merchant (to attract content users may want) and they can tie in Google Checkout users.

On the Google blog, What would you do if you were CEO of Google?, many suggested improvements to Google Checkout. And recently we've read about Android activating 300,000 new users a day. And while the Gingerbread Android OS (with a standard API for interaction with Near Field Communications hardware) may not initially include mobile payments, it represents a huge opportunity and it’s hard to imagine Google will ignore this as it seeks to diversify its revenue sources.

Therefore, I think Google will continue to open and extend their entire Google payment platform. One way Google can to do this and incentivize the customer at the same time would be to partner with an innovative company like Global Standard Financial to build what the Fed says is a “new kind of check – one never having any paper form – (which) will transform the payments industry”. This new payment rail could support all Google’s initiatives from P2P, social, gaming, micro payments, eCommerce, mobile and retail POS payments (swipe or tap your phone to “write” a paperless check).

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