The Social Cost of Google Wallet
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the race for dominance in the realm of digital payments continues, it is worth pausing to consider if there is a social cost to all of these advances. In a recent article on MarketWatch, Michelle Barnhart, assistant professor of marketing at Oregon State University College of Business, is quoted as saying, “Mobile wallets are even more abstract than [credit] cards. They are one step farther away from the reality of handing over cash.” This, she believes, may encourage shoppers to spend more and be more prone to impulse buying. As companies like Google (NASDAQ: GOOG) with Google Wallet, Apple (NASDAQ: AAPL) with Passbook and Discover Financial Services (NYSE: DFS) with its partnership with eBay’s (NASDAQ: EBAY) PayPal each race to change the way consumers do business, we should consider the social impact.
Before continuing, it should be noted that the motivation of this exploration is not to provide an argument against progress. Not that Americans in particular need another excuse to spend, but understanding the subtle implications of new products is an important part of developing a complete investment thesis. Considering not only how consumers will relate to a product, but how regulators and those looking for their next sound bite will react to new trends, can give one an important edge.
Spending Behavior
The fact that consumers are more likely to spend more heavily with the convenience of digital payments has differing investment implications. The positive is that it means that retailers are likely to accelerate their adoption of the technology if they believe it can help drive sales. This should be an advantage for both Google and Apple. Google Wallet already contains a “single tap” feature that makes navigating within its smartphone app nearly effortless. Apple’s Passbook, which will likely be a pre-loaded feature on the new iPhone 5 set be released later this month, will almost certainly have a similar feature.
In this regard, Discover and PayPal may be at a significant disadvantage in the same way that debit cards lag credit cards in driving spending. When consumers think of each purchase as depleting the limited funds in their accounts, they are less inclined to run up large balances than when the card is seen as a deferred payment method. As a consumer instantly sees his or her PayPal account balance fall with each purchase, there is less inclination to spend.
Another significant point of differentiation between digital payment options from Google or Apple and those from Discover is the ease of use. As things currently stand, consumers can easily download Google Wallet and link any number of major cards to it – presumably Apple Passbook will work similarly, but is likely to be tied to one’s iTunes account. Under the Discover/ PayPal option, one needs to obtain a special card tied to one’s PayPal account. There are a handful of retailers that allow one to access his or her PayPal account directly – with plans to expand the direct option – but the process is more involved. The other side of this equation is that Google Wallet is currently accepted at a few hundred thousand locations compared to the seven million that take Discover.
The Benefit to Consumers
One of the positives for consumers is the GPS-enabled discount feature integrated in Google Wallet. The app automatically provides coupon and promotional information to users based on their proximity to certain participating retailers. This should be a huge ad driver for Google, but also helps consumers to realize savings with very little effort. The longevity of this feature remains to be seen, but on its face, it appears to be a positive.
Investment Implications
To date, Google’s main driver of revenues is search advertising. Critics have complained that the company has spent too heavily on technologies that are not driving its bottom line. Products like Google Wallet that will integrate Google’s search capabilities with Google maps and others – like Google’s recent acquisition of Zagat’s – should quiet the detractors and provide the company with another means to drive its ad revenue. Apple is likely to have similar functionality, but as the battleground heats up, the importance of GPS-enabled tech will increase; Google seems to hold the edge on this front. While PayPal may gain a first-mover advantage, it will need to develop auxiliary functionality if it is to compete with Google and Apple.
While Google Wallet is already available, it has not reached the critical mass needed to become an actionable reason to buy the stock – but there are plenty of other reasons. The inclusion of Passbook on the iPhone 5 is important, but will hardly be the focus of the release. Only the union between Discover and PayPal is currently actionable; this move is a positive for both stocks early in the game. Stay tuned to see how developments impact these companies over time.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, eBay, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
