Google Targets Mobile Fund Transfer And Proximity Payment Market With Android Pay

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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 company has now launched Android Pay, which mimics services like Square Cash and Venmo. It will enable users to map to a bank account or debit card, so that they can send money using a smartphone. [2] Furthermore, it allows Android devices to communicate with all NFC-enabled Android devices (running KitKat 4.4+), on any mobile carrier and at every tap-and-pay-ready location across the US.

The new service uses some of the technology that it acquired from Softcard.  [3] This launch once again signifies the growing importance of non-cash electronic mobile transactions. We believe that mobile payments is a big opportunity. In this note, we explore the mobile payment industry and Opportunity for Google.

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Mobile Payment Opportunity

Global non-cash payments transactions are fast gaining momentum due to a host of factors.  These include the long term grwoth trends  in the global economy and the increasing adoption of these services in developing nations. Furthermore, increased penetration of smartphones, aided by increased Internet usage and facilitated by advances in technology, is fueling the growth in mobile and electronic payments across the world.

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. [4] 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. Furthermore, Forrester has projected that over $50 billion worth of fund transfer were initiated using a mobile phone in the U.S. in 2014. It expects the value of fund transfer to increase to $142 billion by 2019. 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 To Gain Traction For Its Pay Services

According to Gartner, over 1 billion Android based phones were sold in 2014. [5] Considering the new devices sold and the existing installed base of Android smartphones, we conservatively estimates that over 1.5 billion such devices exist in the world. This gives Android Pay a heads up to become popular download in the coming future. While currently the app allows users to make secure payments at over one million locations across the US, the company plans to rollout more services over the next few months, such as ability to store loyalty cards and special offer information across the world.

This app has the potential to become a big money churner for Google. 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 offers and ads for users in the future.

We currently have a $657 price estimate for Google, which is 5% above the current market price.

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Notes:
  1. Google to Unveil the Google Wallet Debit Card, 20 November, 2013 []
  2. Tap. Pay. Done, September 10 2015 []
  3. Google in Deal to Boost Mobile Payments, February 23 2015, www.ft.com []
  4. Global Mobile Payments transaction Ticker, December 3 2014, www.paymnts.com []
  5. Gartner Says Smartphone Sales Surpassed One Billion Units in 2014, March 5 2014 []