Google's Android Pay May Be First Mobile Wallet Consumers Actually Use (Sorry, Apple Pay)

Android Pay is almost here. Google says its mobile payments system is "coming soon," and will offer users of Android devices a simple, unified solution for using their phones to make payments in stores and online. Given that more than half the smartphones in the U.S. run some version of the Google operating system, it could be the tipping point that the struggling mobile payments concept needs to gain mainstream acceptance. Despite the widely hyped launch of Apple Pay last year, few consumers these days are brandishing their phones to buy beer, pay a cab driver or snag movie tickets.

In many ways, Android Pay is a rebranding of Google Wallet. It integrates existing Softcard intellectual properties and Google has struck deals with carriers to bundle the rebranded service into their Android phones.

Google Wallet failed to catch on in part, some analysts say, because of a lack of compatible hardware. "No one used it," said Sucharita Mulpuru-Kodali, principal analyst at Forrester Research, covering e-commerce. Three years ago, near-field communication (NFC), the technology behind contactless payments, was a niche feature on phones. But barely any stores accepted payments through the technology. "I think Google killed that offering because it was too early," she said.

Mobile Benchmark

Since then, Apple Pay has established itself as the benchmark for how mobile payments should work. First launched in the U.S. in October 2014, Apple Pay uses NFC to make payments, and comes included in every iPhone 6 running version 8.1 or above of Apple's iOS operating system. It's easy, straightforward, and mostly foolproof: Take a photo of your card, confirm with your bank, then next time you're near a pay point, hold your phone near and scan your fingerprint.

"Android Pay needs to meet the same threshold of simplicity and elegance, at a minimum, that Apple Pay has to drive usage," said Jay Bhattacharya, CEO and co-founder of Zipmark, a business-to-business digital payment platform.

Despite its seamlessness, Apple Pay adoption has been slow and uneven. A report from InfoScout and Pymnts.com stated that the number of Apple Pay users dropped from 15.1 percent of eligible iPhone users in March to 13.1 percent in June, and the number of respondents answering yes to "Did you use Apple Pay on this transaction" dropped from 39.3 percent in March to 23 percent in June. And these are the big earners, too: An August 2014 report from ComScore showed that while the median iPhone app user earns $85,000 per year, the average Android phone user earns $61,000.

But consumer indifference to Apple Pay isn't a reason to write off Android Pay. First, the system has a much lower barrier to entry than Apple's system. The cheapest phone that supports Apple Pay is the 16-GB iPhone 6, which costs $649. On the other hand, any phone running Android 4.4 or higher should be compatible with Android Pay, although the phone will need an NFC chip for wireless payments. And a recent IDC report shows that Android has 78 percent of the global marketshare. Not all of those phones will be NFC-equipped, but with that many locked into the Android ecosystem, many users will eventually upgrade to a phone that includes the new chip.

There is also an impending flood of NFC terminals in the U.S.: Beginning in October, merchants will have to switch to a chip-and-signature system, rather than the classic magnetic strip. When retailers go out to buy new payment systems, they'll be hard-pressed to find ones that don't support NFC. Almost by accident, NFC is about to hit stores all over the country in time for Black Friday, the day after Thanksgiving that is often the busiest shopping day of the year.

A sudden expansion of the mobile payment system on both the client and merchant side will transform the way people pay in stores. But it could also rock the mobile shopping world. "It's the blending of online and mobile payments, so it's not just using your phone when buying coffee, but also using your mobile to shop online," said Rajesh Kandaswamy, research director at Gartner.

Removing Hassles

Before these mobile payment systems arrived, when a user wanted to buy something from an online store on their phone, they had to type in all their information on a tiny screen. It was frustrating: A February study by Forisimo shows that while 13.5 percent of people who start shopping on the desktop complete their purchase, that number drops to 8.5 percent on mobile. Stores like Amazon save card payment details, so that when customers go to order on their mobile, they don't need to enter all their details again. As a result, buyers tend to return to the same stores.

Apple Pay and Android Pay remove many of those hassles. When the phone manages your payment methods, all it takes is a quick password or fingerprint scan to pay in-app for purchases. It's not just stores that benefit: Ride-hailing service Uber supports Apple Pay on iOS, so passengers can pay for a ride instantly.

The greatest potential for these payment systems, however, lies not in what they do right now, but what they could do in the future. Kandaswamy said that when Google and Apple have established payments system in place, payment options will bloom. What about using a PayPal account? Or even paying in stores with bitcoin? "Once you are able to cover the payment mechanism, the mechanism can be modified," he said.

Gordon Baird, CEO of digital banking firm nD bancgroup, explained that the U.S. payment system has a lot of inefficiencies that mobile payments could solve. Store merchants, for example, typically have to shoulder the burden of card payment charges. What if Google and Apple could cut out that middleman, potentially passing on those savings to the consumer? "Those are questions yet to be answered, but they won't be answered in version 1.0," he said.

The launch of Android Pay represents a seismic shift in mobile payments as a key piece of an ecosystem that is looking to go mainstream.