Google's Second Take on Payments
Google Inc. is planning to add several features to its Checkout payments system and may be trying to revamp a flawed business model that was scrapped months ago.
Observers say that the payments capabilities disclosed last week show that the Mountain View, Calif., technology company is trying to address several frequently heard complaints by users, including problems connecting merchants' systems to Checkout and lack of support for micropayments.
However, some analysts also say that Google may have been better off competing on price, even if its earlier attempt to do so was unsustainable.
"The original launch of Google Checkout was successful as long as it was free," said Adil Moussa, an analyst at Aite Group LLC in Boston.
Simplicity was part of Checkout's appeal when it was introduced in 2006, but some merchants saw this as a limitation, which they were willing to tolerate as long as the service offered free processing to companies that also advertised with Google.
Though merchants rarely paid for processing, Google always did, hoping to recoup the expense through ad sales. As the advertising market slumped, this became harder, and Google Checkout "started to become an expense," Moussa said. "They saw that they were actually losing money" and have been forced to come up with another way to generate revenue from payments.
Google's plans for Checkout were outlined in a letter to the Newspaper Association of America, describing ways the media industry could monetize online news content. Harvard University's Nieman Journalism Lab posted the letter last week; a Google spokeswoman confirmed that the Checkout road map is legitimate but would not discuss the company's payments strategy.
Besides micropayments and making Checkout easier for merchants to use, Google is developing a way for users to carry balances in their accounts and a "guest" option that would let people use Checkout to pay for online purchases without creating an account.
Moussa said Google is trying to give the Checkout business model "a second wind."
In May, Google raised its processing fees for most payments, making them almost identical to the rates charged by its rivals PayPal Inc. and Amazon.com Inc. Several industry watchers said then that increasing its fees but not introducing any features to justify the increase could doom Checkout.
"At the end of the day, what does it do?" Moussa said. "It does exactly what everything else that exists already does for the same price."
The backlash was immediate. Many merchants went online to voice their discontent, and Amazon began a free-processing promotion that some saw as an attempt to woo disillusioned Checkout merchants.
Still, Google continued to support the product and its users, which include such prominent retailers as Toys R Us Inc., Petco Animal Supplies Inc. and RadioShack Corp.
Brian Riley, a research director in the bank cards practice at TowerGroup, an independent research firm owned by MasterCard Inc., said that Google "has the potential to be a huge, dominant payment power" but not in Checkout's current format. "They're going to have to do some radical reengineering."
Riley said Google needs to go a lot further than these changes.
"These are not really game-changing things," he said. "These are remedies to current problems that they have."
There is still little hint about whether Google views Checkout as a viable mobile payment system, or has broader plans to expand into the person-to-person or brick-and-mortar spaces, he said.
"They're too niche-y," Riley said. "They're too focused on the virtual world, and they haven't looked to step beyond that."
Google could follow PayPal's example, he said. Years ago, PayPal moved aggressively to step outside the comfort zone it had within its parent eBay Inc.'s online auction site. Today, more than half of PayPal's payment volume comes from outside eBay auctions.
The Google letter said it expects to offer the Guest Checkout feature this year and, by early next year, to roll out a simplified way to connect Checkout to merchants' systems.
It did not say when it would support micropayments, a feature that the analysts said would address a merchant gripe that has existed for years.
Nor did Google give details on when it could roll out its stored-value feature. Moussa said he suspects the two features are joined at the hip and would not be introduced independently.
Google could be planning to support micropayments by encouraging people to fund stored-value accounts up-front and then spend their balances, one small transaction at a time, Moussa said. In that case, Google would pay interchange fees only when the account is funded.
Moussa said that Google is wise to have a relatively near-term target for simplifying integration; merchants have long criticized Checkout as difficult to use. "That's definitely one area that they were losing ground," he said.
Even with the promised improvements, Moussa said, Checkout may not captivate the market.
"There are enough alternative payments out there that are addressing these needs already," he said. "I don't see the need for a Google Checkout; that's just my opinion. We have credit cards that work just fine."