What Does Google Have in its Wallet?

Is Google getting into the online payment business? That was the rumor in late June, when rumors abounded about a planned new service that would potentially pit the search engine giant head-to-head with PayPal. While Google’s CEO denied that the service would be competing in the same field, it’s worth analyzing where Google might be going, and what challenges it faces.

In late June, the Wall Street Journal featured an article that set off a major buzz among industry analysts, search engine optimizers, online merchants, and others. In the article, the WSJ reported that Google planned to launch an electronic payment service, entering an arena that PayPal has all but owned for years. The service, supposedly code-named Google Wallet, could offer the search engine giant a huge opportunity to diversify its revenue stream.

The WSJ article pointed to hints that Google Wallet has been in the works for some time. It said that Google’s website states it “will eventually allow consumers to pay to view videos online.” In fact, John Battelle’s Searchblog claims to have confirmed that Google will do a beta launch of an in-browser video playback feature based on the open source VLC media player. A more tantalizing hint came from an online California state business database, which revealed that Google filed on April 13 to incorporate an entity called Google Payment Corp. Coincidence, or conspiracy? Well, most press hounds love a conspiracy after all.

For several days, Google Wallet was hardly more than a rumor, but the stock market has been known to act upon less. The Monday after the story broke, Google saw its stock rise more than two percent, or $6.40, to close at $286.70 on the Nasdaq. Meanwhile, the potential service’s strongest potential competitor saw its stock drop by a similar percentage. eBay, the online auction giant who owns electronic payment service PayPal, finished at $37.24 per share the same day, down by something under a dollar.

Google CEO Eric Schmidt finally made a statement the following day, in an apparent attempt to stop, or at least slow down, all the speculation. During an interview with the Associated Press, he explicitly said, “We do not intend to offer a person-to-person, stored-value payments system.” This description certainly fits PayPal. Rather than stop everyone from wondering what Google was up to, however, Schmidt’s statement seemed to add fuel to the fire. If the search engine giant does not intend for Google Wallet to compete with PayPal, what are Google’s plans for the service?

I’ve already mentioned John Battelle’s Searchblog. He actually goes into a bit of detail about the video playback feature. It’s an outgrowth of Google’s video search and upload function. Google began accepting videos from pretty much anyone back in April –- right around the time it registered Google Payment Corp. Apparently, the content could be uploaded to Google with either a “free” or “payment” option. In this way, Google could become a host of sorts for those who can’t host and stream their own video, but still want to reach lots of people with it. Handling the payment part of it as well could be a real boon to independent filmmakers and others who don’t want to deal with those details. This move would not put it into direct competition with PayPal.

This idea could easily be expanded beyond video. While the only company that seems to have had much success with having customers pay for online content is the publisher of the Wall Street Journal, Google Wallet could change that. The service could be set up to handle small payments from those who want to view copyrighted material online to publishers of such material. Such a service, handling enough transactions, might even turn a profit on micropayments. Indeed, Google Wallet might, in general, make it easier for Google to sell things through its search engine.

A number of analysts think that Google will be taking a different route with the service, though not one that excludes the possibility of doing pay-for-video. Google already has a shopping comparison service, appropriately named Froogle. Tying Google Wallet in with Froogle seems like a natural move, which again would not compete directly with PayPal.

Yet another way that Google could enter the online payments business without competing directly with PayPal is by accepting the kinds of transactions that PayPal won’t touch. On eBay, these are considered “high-risk” transactions, and usually involve items labeled “adult entertainment.” It’s an open question whether Google would want to get into that end of the business.

If the folks at Google do not wish to compete directly with PayPal, you can hardly blame them. It’s true that the company needs to diversify (more on that in a moment). But PayPal earned its spot as the first company that comes to most people’s minds when they think of online payment companies…in somewhat the same way as Google earned a similar spot for its search engine.

It’s funny how old sayings can still ring true in this age of the Internet. Do you remember the one that goes “don’t put all your eggs in one basket”? Well, Google gets most of its revenue from sales of online advertising. By “most,” I mean just one percentage point short of “all.” Granted, Google made more than three billion dollars last year from that one basket, but plenty of companies have gone into bankruptcy because they made their living from one revenue stream that eventually dried up.

If Google Wallet was an online payment service a la PayPal, it would give Google another source of revenue. As anyone who has used such a service knows, these companies make their money by taking a fee for acting as the intermediary and enabling transactions that could not otherwise take place. For example, if I successfully ran an auction on eBay, and the winning bidder wanted to use a credit card, I would be out of luck because I can’t (as an individual) accept credit cards. However, as a Premiere member of PayPal, I can accept credit card payments from other PayPal members –- minus a small fee for each transaction. At two and a half percent per transaction, that really adds up.

But the job of an intermediary is not an easy one, as PayPal co-founder Max Levchin revealed in an interview with The Register recently. He pointed out one of the reasons for PayPal’s success: its willingness to take on more risk than its competition. Indeed, according to Levchin, PayPal helped enable eBay to grow because “we were taking on their riskier users, which meant (among others) their new users, where there is the least amount of information.” However, he adds, the only way you can get the data to be a good risk manager “is by letting bad transactions go through your system and learning from that. And that hurts!”

Indeed, PayPal is such a strong competitor on its own turf that it effectively put BillPoint out of business. BillPoint was the electronic payment service that eBay itself created for its users. By 2002, eBay admitted defeat and bought PayPal. Yahoo’s online payment service, Yahoo PayDirect, launched in 2000, also fell to PayPal; the company officially closed the service in May because it didn’t garner enough users. Would Google fare any better against this powerhouse?

A number of analysts are seeing this move as truly dangerous to PayPal. Gartner analyst Avivah Litan observed that “This is probably the biggest threat to PayPal that has come along so far.” Still, Google does not have a well-known name in this area, and PayPal does. Does search engine expertise translate into the expertise necessary to succeed with this particular service? Google seems to be making a go of plenty of other services that you would not naturally connect with search, such as email. However, none of those services involve an exchange of money, and that’s an area that makes people a little touchy.

Strangely, the fact that Google doesn’t have a name in this area could, alternatively, give it an advantage. While many PayPal customers have used the service successfully, others have experienced their share of horror stories –- payments not going through, accounts frozen, inability to access money, unresponsive (or worse) customer support. Google  has a reputation for doing things right once it ventures into an area. If it does decide to compete with PayPal, either now or as part of an expansion of Google Wallet, it could benefit from the release of a lot of pent-up frustration from PayPal customers.

But Google’s biggest hurdles are ones that I only hinted at above. Yahoo, eBay, and even Microsoft (with MSN Wallet) have tried to break into this area, and failed. Yes, the biggest problem was lack of customers, especially as compared with PayPal, but there were other problems. According to Max Levchin, when PayPal squared off against eBay’s offering, “PayPal was a startup and had the cojones to learn how to beat fraud the hard way, so…PayPal had a more compelling offering, because we were willing to take on a lot more risk.”

If Google does decide to go head to head with PayPal, it must be prepared to learn how to deal with fraud, and how to handle risk. Neither of these are easy. Then again, Google didn’t get where it is today by taking the easy way.

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