Two-thousand and twelve was so supposed to be the year of the digital wallet. And Google was supposed to lead the way. But it looks like the Google Wallet app has gotten off to a bumpy start.
Six months after Google introduced Google Wallet, the app, enabled by near-field communications, or NFC technology, is still struggling to find carrier and device partners, as well as, retailers willing to support the new technology. And last week, the company temporarily took part of the Google Wallet application offline while the company figured out how to fix a security issue.
Could Google Wallet soon go the way of other interesting Google pet-projects like Google Labs, Google Health and Google PowerMeter? Those programs were all canceled after Google's CEO Larry Page said the company needed to focus on its core business and "put more wood behind fewer arrows."
"Google often jumps head-first into new projects, paddles around, and then decides whether it's worth staying in," said Michael Gartenberg, an analyst covering mobile for Gartner. "I don't think Google would pull the plug on Google Wallet entirely, but they may be slowing down and regrouping."
Will security be Google Wallet's downfall?
Indeed, this makes sense given that recently discovered security flaws may have spooked some consumers.
On Friday, Google temporarily disabled the ability to set up new prepaid cards in its Google Wallet app after it was discovered that if someone lost his Google Wallet-enabled phone and the screen of the device wasn't locked that someone finding the phone could reset the PIN and gain access to whatever money was left on the Google Prepaid card.
The way that Google Wallet works is that it stores a user's credit card information, as well as information for a prepaid Google payment card, in a digital app on the phone. Subscribers can use any of the credit cards stored in Google Wallet or the prepaid card when checking out at a store by tapping their phones to a payment terminal.
Even users who cleared their Google Wallet app from the device still left behind the prepaid balance on that particular phone because it was stored to the secure element on the device, the company said.
Osama Bedier, vice president, Google Wallet and Payments, said in a blog post Friday night that part of the app had been disabled, but that it would be restored once a permanent fix to the security flaw has been found.
"To address an issue that could have allowed unauthorized use of an existing prepaid card balance if someone recovered a lost phone without a screen lock, tonight we temporarily disabled provisioning of prepaid cards," he said. "We took this step as a precaution until we issue a permanent fix soon."
Gartenberg said that it was a good idea for Google to disable this functionality and make sure the security flaw is eliminated before allowing more people to sign up for the app, even though the flaw itself is not a major risk.
"The perception of security is a big deal when you're trying to get people to sign up for a new service like this," Gartenberg said. "And Google can afford to take time to regroup and make sure the security is nailed down."
Google maintains that security on the Google Wallet is solid. And it claims that using the app can be even more secure than using a regular credit card.
"People are asking if Google Wallet is safe enough for mobile phone payments," Bedier said in his blog post. "The simple answer to this question is yes. In fact, Google Wallet offers advantages over the plastic cards and folded wallets in use today."
Outfitting retailers with NFC
But perceived and/or real security concerns are just one hurdle that Google must overcome to make Google Wallet a success. Six months after Google launched the app, Google still has only one carrier partner, Sprint Nextel. And there are only two devices that are NFC-enabled and Google Wallet-ready, the Samsung Nexus S 4G on Sprint and the unlocked Galaxy Nexus, which can be used on AT&T's 3G network in the U.S.
More devices are expected to be introduced to the market soon. Sprint said it will sell two additional NFC-enabled smartphones that will use Google Wallet in the first half of this year. The new Apple iPhone expected to launch later this year may also have an NFC chip embedded, but there's no telling if it will be able to access the Google Wallet app.
Meanwhile, other device makers aren't clamoring to get NFC into their devices. Motorola executive Christy Wyatt said in a recent interview that Motorola hasn't added NFC to devices yet because it adds cost and bulk to the smartphones. And since customers haven't been asking for NFC, Motorola has left it out.
"I guess there's a bit of a chicken and egg issue here," she said. "We haven't really seen an appetite for the applications and technology from consumers yet. There doesn't seem to be a real need from consumers for mobile payments."
Still, she said that Motorola plans to launch a device with NFC technology embedded in it in the "not too distant future."
Carriers in control
It's true that consumers may not be clamoring for the technology, but it may be in part because wireless operators aren't making it easy to get their hands on it. This could be a major problem for Google. Even though the Google Wallet doesn't need carrier support to function, some operators are making sure the app doesn't work on devices on their networks. For example, even though the Samsung Galaxy Nexus, Google's latest pure Android experience smartphone, has an NFC chip in it, Verizon Wireless won't allow the Google Wallet app to work on its network.
Verizon likely put the kibosh on Google Wallet because it is already working on its own mobile wallet app through a joint venture with AT&T and T-Mobile USA called Isis. The group is expected to release its own digital wallet later this year, possibly making a big announcement at Mobile World Congress in Barcelona later this month.
But even Isis, which will be supported on multiple carriers and likely across a wide variety of devices, will face another major problem that Google must overcome. And that's getting NFC-ready equipment installed at retail locations.
In order for any of these smartphone payment apps to work there needs to be an NFC-enabled smartphone that can communicate with an NFC-ready terminal. Getting retailers to invest in the necessary technology upgrades has not been easy. And many retailers still have not deployed the technology.
PayPal, which had been experimenting with NFC payments last year, recently said it plans to enable mobile payments without using NFC. Instead, PayPal said accounts could be accessed via a phone number and PIN code. The way it would work is that when a customer cashes out at a retailer, he selects PayPal as an option.Then he enters his phone number and the PIN associated with the account.
There's no need to swipe a phone, which means that neither the phone nor the payment terminal must have the NFC hardware installed. The only thing that the retailer needs is a software upgrade to the payment system, which is a much less expensive upgrade than purchasing a new terminal.
A Google representative said that it's still early days in the mobile payment market. And he said Google is still committed to its Google Wallet program.
"We are very enthusiastic about the start we've had with Google Wallet," said Nate Tyler, a spokesman for Google. "We believe Google Wallet represents an opportunity to bring more value to the transaction, so that consumers can not only pay, but also save and earn rewards when they make purchases."
Indeed, the mobile payment market is still young, but given the fact that Google was able to go from zero market share in smartphones to a dominant leader within 24 months, it's safe to say the mobile market moves fast.
And if Google executives feel like success is taking too long to achieve, the company may cut its losses and move on as it has done with failed projects of the past. But it's probably more likely that the company may quietly retreat and re-imagine the Google Wallet offering, much like it's done with Google TV.
When Google first announced Google TV, it was essentially shut-out of the the market by the TV networks, which refused to stream their shows to Google TV. It looked like Google TV was dead in the water. A year later, Google has reshaped the service so that it complements instead of competes directly with TV networks and cable TV providers. And now Google TV may have found new life.
Google could do a similar thing with Google Wallet. It could find a way to work more directly with wireless operators, instead of potentially competing against them.
"It may take some time to get things sorted out, as is typical with a lot of Google projects," Gartenberg said. "But I doubt they'll quit this market entirely. Still, it's going to be a competitive market. Anyone who has a piece of mobile wants in. And I don't see anyone ceding dominance to Google."