Google’s Wallet Ventures Into Debit Card Space

by Trefis Team
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Google (NASDAQ:GOOG) recently introduced a prepaid debit card linked to its Wallet services. [1] The debit card, which is only available in the U.S., lets a user access funds stored in their Google Wallet account to buy goods, withdraw money from ATMs and transfer money. This move not only aims to popularize the Wallet services amongst user and increase Google’s share in the growing mobile financial transaction market, but also provide Google insight into a user’s offline shopping behavior that can be leveraged to customize advertising. In this article, we will evaluate what Google wants to achieve through this new offering.

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The Transaction Market

In our note published earlier, we have explained how the card companies work. To summarize, third parties such as Visa (NASDAQ:V) and Mastercard (NASDAQ:MA) facilitate transactions between financial institutions, and ease the purchase of goods and services by a user.

The global non cash payments transactions continue to gain momentum, due to an improvement in global economy and an increase in adoption of these services in developing nations. Furthermore, increased penetration of smartphones and Internet usage, advances in technology, and innovative products and services are all fueling the growth in mobile and electronic payments. Research firm Gartner estimates the value of global m-transaction payments will total $235.4 billion in 2013 and grow to $720 billion by 2017. [2]  However, according to Nilson (see the graphic below), majority of purchase volume continues to stem from electronic cards, which are worth over $3.5 trillion.

Source:Nilson Report

Google’s Strategy For Wallet

Google Wallet is a virtual copy of the contents of a consumer’s physical wallet, and facilitates online or offline retail transactions. When a user makes a transaction using Google Wallet, details of the virtual card are passed on to the merchant via Near-Field Communication (NFC) technology. However, Google Wallet’s original NFC system has failed to gain traction among users – consumers and merchants alike. The primary reason for this has been security concerns about the stored card and consumer data. Since consumers continue to prefer plastic cards rather than virtual cards for shopping, Google launched the prepaid debit card that targets the $3.5 trillion card industry in the U.S. We believe that Google’s share in physical card market will be limited as the company has to share the intercharge fee (capped at 21 cents plus 0.05% of transaction amount) with Bancorp and a transaction fee with MasterCard. [3]

However, Google’s main motive behind the launch of Wallet services has always been to collect user data that Google could use for targeted ads. Since Wallet services have not fared well in the past, this effort can be seen as a last ditch effort to revive Google’s plans for Wallet. If this services gains traction, Google will have access to offline shopping behavior of a user that can be clubbed with the online shopping behavior to customize and improve user experience.

A recent study by comScore Inc. (NASDAQ: SCOR), suggests that 8% of mobile Wallet users in the U.S. currently use Google Wallet whereas around 48% use PayPal. [4] If Google can improve its market share to 50% over time through a better user experience, then Google can reach a transaction volume of $900 billion from mobile and offline payments. Additionally, the increase in transaction volume will translate into more consumer data for Google and better targeted ads for users in the future.

At present, we have a $865 price estimate for Google, which is 20% below its current market price.

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Notes:
  1. Google to Unveil the Google Wallet Debit Card, 20 November, 2013 []
  2. Gartner Says Worldwide Mobile Payment Transaction Value to Surpass $235 Billion in 2013, June 4 2013, www.gartner.com []
  3. Read Google’s Wallet Expansion Could Help MasterCard for details on How the Fee is shared among the three parties []
  4. comScore Study Highlights Digital Wallet Market Potential and Current Adoption Barriers []
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