24 April 2014


Alexander Peschkoff - TEDIPAY

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Google Wallet is losing money on EVERY transaction

29 August 2012  |  18814 views  |  5

At launch, Google Wallet (GW) was based on Trusted Service Manager (TSM) business model, similar to the one still favoured by the mobile network operators (MNOs), e.g. ISIS. Under that scenario, GW offered access to its embedded Secure Element for storing card details and authentication credentials. Unlike MNOs, GW was not greedy and offered reasonable commercial terms. Nevertheless, for many reasons, there were few takers...

When Google realized that it could takes months, if not years, to negotiate and agree a deal with every card issuer (there are over 8,500 card-issuing financial institutions in the USA alone), they ditched the TSM model. Instead, they decided to focus on what they do best - delivering customer experience and monetizing "big data". Welcome to Google Wallet 2.0.

GW 2.0 works as follows: consumers can add any card to it by entering card details, just as they currently do at Amazon, iTunes and PayPal. GW 2.0 is "fronted" by Google's own card (MasterCard provided by Citi bank, although Google is planning to add Visa card too to widen GW acceptance). To pay, the consumer selects one of the cards "stored" in GW.

Here's where things get interesting. All transactions are first charged to Google's own MasterCard; Google then charges the card which the consumer selected for that transaction. That means Google effectively issues an instant short-term credit - and assumes credit risk (!) - for each transaction (that could be infringing BillMeLater patents which are now owned by eBay/PayPal).

But that's not all. Google shares interchange fee with Citi. Google's own card is a debit one. That means that the interchange fee is capped to 21 cents + 0.05% of the transaction amount. However, if the card added to GW and selected by the consumer for payment is a credit one, Google is charged around 2% on that transaction. Moreover, Google takes on an additional risk as all transactions with consumers' cards, "stored" in GW, are done on "card not present" (CNP) basis.

What is the significance of all that? Let me give you a monetary example. When I make a purchase using GW - but selecting one of my own credit cards "stored" in GW - Google first charges that purchase to its own card (Transaction 1), and only then charges my card (Transaction 2). With a $100 payment, Google earns around 50 cents on Transaction 1, and is charged around $2 for Transaction 2, thus incurring a net loss of around $1.50. 

Google is also exposed to $100 risk twice: when paying the merchant before charging my card (Transaction 1), and when accepting my card on the CNP basis (Transaction 2). If I don't have sufficient funds on my card, or if the card I registered with GW is stolen, Google could be hit for the full transaction amount.

Why do they do that? Several reasons, including consumer convenience, faster adoption, and - most importantly - access to the shopping/payment data. Is it worth it? If GW signs up 10m customers who would spend $1,000 during the first year making 100 purchases, that's a $150m loss. How much money can Google make using (valuable) data on those 1bn transactions, via targeted offers, relevant advertising, loyalty rewards, etc. My (informed) conservative guess is - at the very least, enough to break even. What if Google starts offering credit-based products (remember, they already provide instant short-term credit)? Using such companies as CapitalOne or GE Money as a benchmark, the value of a 10m GW customer base would be around $2bn.

When it comes to payments, at present, there are very few companies in the world who (even potentially) can operate using the same business model, i.e. losing money on every transaction in order to gain customers and data. By doing that, Google is setting standards and consumer expectations which, for most players, are very hard to match. That's a strong "unfair" competitive advantage which is not to be ignored or taken lightly.

How does one compete with GW? By offering even better, unparalleled, user experience and delivering value and features not available elsewhere. Can MNOs or banks do that? No comment.

TagsMobile & onlinePayments

Comments: (8)

A Finextra member | 29 August, 2012, 21:50

Google could easily incentivise consumers to pay with the Google/Citi card rather than any other card - eg. "use your Google/Citi card for payment, and we'll credit you with cashback of 50cents".  

Even a small incentive could change consumer behaviour.  Paying out a 50c rebate would be cheaper than losing $1.50 per transaction.  

So far we have not seen any clear, bottom-line incentives for consumers to select one payment card over another...Google could easily offer an immediate net benefit from using their card.. 

Alexander Peschkoff - TEDIPAY - London | 30 August, 2012, 16:37

GW "bleeds" less than I estimated.

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 31 August, 2012, 14:07

At "21 cents + 0.05% of the transaction amount", total interchange fee on Transaction 1 for US$ 100 works out to 0.21 + 0.05*100/100 = 26 cents. If, as you say, "Google shares interchange fee with Citi", Google's earning from Transaction 1 is less than 26 cents. Not sure how you estimate this figure to be 50 cents. 

More importantly, if Google earns interchange on Transaction 1, not sure why GW can't use a credit card in the Secure Element instead of a debit card? After all, the merchant will bear the higher (2%) interchange.

Assuming that GW already permits consumers to add more than one card to their GW account, Google could offer to automatically route Transaction 2 type transactions to these different cards in such a way that the cardholder can maximize their rewards. Even if it can't find a way to charge for this service, Google could at least use it to boost the value proposition of GW to consumers. 

Maybe you've covered all this and more in your "bleeds" less post, but I can't access it - clicking the link simply takes me to my own Finextra Member Profile page!

Alexander Peschkoff - TEDIPAY - London | 31 August, 2012, 14:58


Sorry for the "broken" link, try this one.

That 2nd post indeed answered most of your questions. Currently, there is no way to route a transaction to Card B after you initiated it at POS using Card A. We are talking to one of the networks about such "mapping".

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 31 August, 2012, 15:38


Okay, thanks, I've read your "bleeds post" but this question remains: "More importantly, if Google earns interchange on Transaction 1, not sure why GW can't use a credit card in the Secure Element instead of a debit card?"

Wallaby Financial does claim to provide a way to route a transaction initiated on the POS using Card B to not just one Card A but many other cards viz. Card C, D, E...

Alexander Peschkoff - TEDIPAY - London | 31 August, 2012, 15:49


GW's card is "prepaid", i.e. it earns an interchange fee that is higher than debit (and GW's issuer is exempt from the cap anyway). I guess Google cannot front GW with a credit card due to the rules as to what constitutes a "credit" card.

Funny that you mentioned Wallaby - none of the processors or issuers we spoke to in the past could explain how (and if!) that can really be done... They are at the beta stage, hence they could well be running, for now, using GW's "double acquiring" model, just to test the waters.

A Finextra member | 31 August, 2012, 19:31

I dont think the question is 'How does one compete with GW?' it should be Who  wants to compete with GW's loss making model when there are profitable models out there? 

Will consumers be charged a cash advance fee for the top up transaction from their credit card to the GW MC debit card?  That could hurt......

There is also a potentially huge fraud and reputational damage angle here....  If the system is compromised GW could be liable for hefty fines, it could also be open to significant fraudulent spend/chargebacks and therefore potential reputational damage.... As there is no real volume in mobile (yet) I would suggest the fraudsters are waiting for the target to get fatter before they descend on wallets to see what they can exploit....

The question Google should be asking themselves - is - "is operating a loss making system worth the risk"?  I have not modelled this fully but based on the points above I dont think GW will find a compelling business case without linking the wallet directly to ACH if they can. Also we are now seeing the birth of US Private Label/Merchant led consortiums that will (if smart) build wallet/app connections to the ACH or link directly to the bank owned debit cards of their consumers... Merchants can find lots of cost savings to fund the infrastructure needed, by reducing their interchange expense. 

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 25 December, 2012, 13:16


Congrats for authoring Finextra's Top Blog Post of 2012!

In case you haven't noticed, let me refer you to this TechCrunch post and my comment around the delay in the launch of Wallaby Card.

Looks like your above comment - "Funny that you mentioned Wallaby - none of the processors or issuers we spoke to in the past could explain how (and if!) that can really be done..." - is bang on :)

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