How Google Wallet works?

Google launched its much awaited NFC-enabled mobile payment platform, Google Wallet, which enables users to store credit cards, offers, loyalty cards and coupons on a phone. A mere tap at the POS will not only make a payment but also redeem loyalty points and coupons.

Google says the smartphone payment system is extremely secure as the app has a personalized PIN. The NFC antenna in your phone is only activated when the screen is powered on, and even if the antenna is on and in proximity of a reader, payment credentials can only be transmitted from the Secure Element to a payment terminal if you first enter your Google Wallet PIN.

Google says both the Android platform and the Secure Element are designed to prevent malicious applications from accessing the credit card embedded on the smartphone. So there shouldn't be any fear of someone getting too close for comfort and probably stealing sensitive data, it says.

How it works?

An NFC-enabled phone has a payment application (credit or debit card) issued by the consumer's financial institution installed on the phone. The application and encrypted information are loaded on a secure area in the phone. The phone uses the built-in NFC technology to communicate with the merchant's contactless payment-capable POS system, similar to the contactless payment cards and devices in use today. The payment and settlement processes are similar when the consumer pays with a traditional contactless or magnetic stripe credit or debit payment card.

NFC as a technology is inter-operable and compatible with the underlying grid of hardware, security elements, regulations and communication protocols which make the payment machinery work.

The payment mechanism has multiple rails which are being managed by various stakeholders. Multiple computer systems running multiple software programs keep the system greased. Pymts.com explains the process of how the plumbing works.

When a credit card is swiped a POS terminal sends the card information with details of the transaction to a switch. The switch, which may be operated by a variety of payment players, has a software program that decides what to do with the transaction. It will send it on to a merchant processor that will keep track of the details of the transaction and act as an intermediary with a clearing and settlement system which will contact the bank processor that acts on behalf of the bank that issued the card or possibly the bank itself. Many software programs running on numerous pieces of computer hardware are involved in the various steps in the process.

The above stated example is about the credit card rail and similar such structures exist for other forms of payment as well. NFC-enabled mobile payments also have to tap into this plumbing, a task which would require setting up a software platform over the grid which can communicate over the rails. Google with its Mobile Wallet is attempting to build such a platform and then by opening system through APIs, it give plugging points to various partners to tap this syste

Road Ahead:

Currently, there are multiple barriers for NFC-based mobile payments. A report titled Mobile Payments in the United States Mapping out the Road Ahead quotes an example to underscore the point.

It states: The card networks, issuers, and acquirers have developed robust fraud analytics around mag-stripe technology and NACHA has developed monitoring processes which have mitigated ACH risk to a certain degree. Stakeholders are reluctant to invest in terminals and handsets in the absence of more certainty around changes to the infrastructure and the risk of making the wrong business decisions. The cost for merchants and issuers to invest in new device readers at the POS and for contactless chip-enabled payment devices, including cards, phones, and possibly other form factors, is significant.

Google is attempting to launch a mobile payment revolution by acting as an entity that could manage all the other stakeholders - consumers, issuers, merchants, acquirers, mobile operators, payment networks and phone makers.

However, the success of NFC-enabled mobile platforms will depend on the following parameters as suggested by the Mobile Payments in the United States Mapping out the Road Ahead report.

Open Mobile Wallet - Development of a platform which would embrace a technical architecture that enables the wallet to support a wide range of payment methods and networks, would comply with agreed upon industry business rules and standards, would employ a secure element or container in the mobile phone to interface with the mobile payment applications, and would utilize appropriate wallet protocols and processes, such as the ability for multiple payment applications to share the wallet.

Apart from the chicken-and-egg problem which proximity mobile payment or NFC-aided mobile payment faces, other issues like -- fine-tuning of regulatory issues as mobile transactions will cross over domains covered by multiple regulatory agencies, a common technology standard, dynamic data authentication method for security and common platform that taps the existing clearing channels and rails -- is essential to the mass adoption of the NFC-enabled mobile payment technology.

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