Google’s mobile wallet appears to be staggering to the finish line of 2012. After all, it was a year that started with a reported security breach and is ending with speculation that the search-engine giant will add a plastic card to the otherwise entirely digital wallet. 

Neither occurrence represents a terrific endorsement for the power of mobile payments.

The plastic-card news in particular is a poor indicator of the viability of a mobile payment system that relies on Near Field Communication technology to enable payments at the point of sale. Relatively few handsets are built with NFC chips, and many retailers lack the technology to read signals from those phones.

“From Google’s perspective, they were not really making any money on payments, so high-tech payment methods are not adding any value,” says Richard Oglesby, senior analyst and mobile pay expert with Boston-based Aite Group. “They want to enable advertising, and you don’t need high-tech payment to do that because it’s actually a barrier.”

Google is reportedly working with Discover Financial Services on a plastic card that would use Discover network rails for point of sale transactions. Discover is already a key partner in PayPal's digital wallet, and was the first network to support the Isis wallet. 

Google has made other changes to its mobile wallet, transforming it to remove flaws that became apparent in its first year. And to Google’s credit, it entered the market a year ahead of major rivals such as Apple’s Passbook and the wireless carriers’ Isis.

One of Google’s major difficulties was luring card brands and issuers as partners. It had Citigroup Inc. on board from launch — but no other issuers worked with Google Wallet until Google fundamentally changed the way it handles such relationships.

The original approach allowed issuers to place card data securely on the phone, so that payments made through Google Wallet appeared to the merchant as a normal card payment. Though this method seemed friendlier to the issuer, it required a long integration.

In August, Google added an option to instead let linked cards fund a virtual MasterCard. Though merchants would now see only the virtual card, instead of the card that is funding the transaction, integration for issuers became instant — banks simply had to provide card art and other basic details. Consumers could even enroll cards on their own. 

In addition, Google moved the card data from the secure element in the mobile phone to cloud-based storage. It also began phasing out a Google-branded virtual prepaid account tied to its wallet app. 

But a tiff with American Express Co. was right around the corner, because Amex felt it was improperly included in the list of networks Google supports.

In the meantime, Google was facing increasing pressure from the mobile carriers' pending Isis wallet, which also uses NFC technology and a paired offers system, and the news that major retailers are creating a competing product through the Merchant Customer Exchange initiative. 

The rumored Google Wallet plastic card, which some industry observers say is imminent, would be the next fundamental change to Google’s original mobile-pay model.

A plastic card for the Google Wallet “is more of a step back than anything else,” says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup.

“It’s a new model, but it’s like ‘back to the future’ again,” Riley says. “We don’t know if they will really get it (a plastic card) out in the field, but it could just be like another PayPal prepaid card out there to function at the point of sale.”

PayPal already offers a card for use with its own digital wallet, but it hasn’t seen much use — 70% of transactions are completed without the card, PayPal’s parent eBay said during an earnings call. 

“Google has had its ups and downs this year, and you are always wondering what is next from them, but not much of substance has come out," Riley says.

Google began its year addressing a security flaw discovered by zvelo Inc. of Greenwood Village, Colo. Researchers found it was possible to crack the wallet’s PIN if the Google Wallet app is loaded to a phone that has been “rooted” to run unauthorized software.

The app was also written in a way that allowed users to access stored funds by erasing the PIN entirely. Google quickly fixed this flaw and offered compensation to affected users.

All NFC-based mobile wallets face issues with the lack of available handsets built with the technology. For Google, this was compounded by a lack of support from major carriers. The company surely breathed a sigh of relief when Sprint announced it would continue to support the wallet with its handsets. 

Google Wallet is Google’s second major attempt at establishing itself in the payments industry. In 2006, Google debuted Google Checkout, an online alternative payment system. Checkout faced its own ups and downs, and Google eventually folded that system into Google Wallet.

In the next three to five years, Riley predicts, Google will contemplate an entry into the banking industry with a Google Bank. “They will be looking to enter that financial services space,” he says.

In the meantime, next year should provide much more news for Google, and likely more payments competition for banks, Oglesby says.

“The year 2013 shapes up to be fairly interesting because Google and PayPal have goals to establish POS brand[s with plastic cards] and incorporate their value-added services,” Oglesby says. “I believe that banks will struggle to compete with those offers.”

Google did not respond to requests for comments related to the company’s progress in 2012 or its future goals. A Google spokesperson said the wallet development team was not taking interviews during the final weeks of 2012.

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