Google Wallet’s Deal With SoftCard Can Boost Its Market Share In Mobile Payment

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Google (NASDAQ:GOOG) introduced Wallet services in 2011 and a prepaid debit card linked to its Wallet services in November 2013. [1] However, despite this significant push by Google, Wallet’s original NFC (Near Field Communication) system failed to gain traction among users — consumers and merchants alike. The primary reason for this has been privacy and security concerns about the stored card and consumer data, which Google had asked Banks to share with it so that Google could serve targeted ads to users. To target the ever growing mobile payment industry, counter the popularity of Apple’s Pay services, and boost its Wallet services, Google announced on Monday that it will acquire mobile wallet technologies and patents from Softcard. [2] Gartner predicts that the mobile payment market will reach $700 billion by 2017, with NFC services accounting for 5% of the total transaction volume. U.S. mobile proximity payments, defined as payments made with a smartphone at the point of sale (PoS) in place of a credit card or cash, reached $3.5 billion in 2014 according to eMarketer. The data firm estimates that by 2018, mobile proximity payment transaction value will reach 118 billion. Paymnt.com also estimates the number of mobile transaction users as follows:

Number of Users (In Millions) 2014E 2015P 2106P
Europe 44.6 54.1 65
North America 60.9 75.7 90.7
Asia/Pacific 120.8 141.4 163.6
Middle East 3.4 4.7 6
Africa 80.5 91 101.3
Latin America 13.4 17.3 22.3
Total 323.6 384.2 448.9

Leveraging Android’s Popularity Through The Deal

Given Google’s brand image and the fact that the Google Wallet is closely linked to the Play store for Android phones, we expect Google to gain market share in the coming years. The deal has given momentum to Wallet services as its Wallet will be pre-installed later this year in the US on Android phones sold by AT&T, T-Mobile USA and Verizon Wireless which backed Softcard through this joint venture. While 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 the company’s market share reaches 50%, then Google can reach a transaction volume of $900 billion from mobile payments alone. Additionally, the increase in transaction volume will translate into more consumer data for Google and better targeted ads for users in the future.

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We currently have a $546.89 price estimate for Google, which is 3% above the current market price.

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Notes:
  1. Google to Unveil the Google Wallet Debit Card, 20 November, 2013 []
  2. Google in deal to boost mobile payments, February 23 2015, www.ft.com)) In this note, we take a look at the transaction processes associated with cards and evaluate what Google wants to achieve through this new offering.

    Click here to see our complete analysis of Google

    How Do Card Companies Work?

    A normal transaction via a debit card or a credit card involves four parties: The cardholder, the merchant, the cardholder’s bank (also called the issuer) and the merchant’s bank, or the acquirer. Visa (NYSE:V) and MasterCard (NYSE:MA) primarily operate networks serving as communication channels between the financial institutions involved, facilitating services like data processing, authorization, clearing and settlement. The issuer bank issues cards bearing the Visa or MasterCard logo to cardholders, who can then use these cards for transactions. These transactions are then authorized by the issuer using the payment processing network, after which the institution pays the acquirer the amount of the transaction and charges an interchange fee from the acquirer (for debit cards, this fee is capped at 21 cents and 0.05% of the value of the transactions). The acquirer, in turn, charges a discount fee from the merchant to cover the interchange fee it has to pay to the issuer.

    The network providers, i.e. MasterCard and Visa, do not earn any money from cardholders or merchants, but instead charge fees from the issuer and the acquirer. The fees can be classified into three broad classes: Assessment Fees, Transaction Fees and Cross-Border Fees. Assessment fees are charged to issuers and acquirers as a percentage of the billing currency (generally U.S. dollars) equivalent to transactions carried out by the institution using the network provider’s products. The average assessment fee is around 0.1% of the gross dollar volume of transactions. Transaction fees account for 30% of the company’s net revenues and are charged on both domestic and cross-border transactions based on the number of transactions processed for each customer. The total average transaction fee charged by a network provider is around $0.095 per transaction. Cross-border fees are charged when the issuer and acquirer are in different countries and are not in the scope of this discussion.

    Mobile Payment Opportunity

    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, together with increased Internet usage, advances in technology, and innovative products, are all fueling the growth in mobile and electronic payments.

    According to the data available on payments.com, worldwide mobile payment transaction values were around $235.4 billion in 2013 and are estimated to be $325 billion in 2014. ((Global Mobile Payments transaction Ticker, December 3 2014, www.pymnts.com []