Google's (GOOG) purchase of the prepaid card processor TxVia shows its commitment to shore up its digital wallet's risk management capabilities, particularly in light of some recent snafus.
In February, experts discovered security issues with the Google Wallet product that allowed an attacker to either extract a consumer's PIN from a compromised smartphone or sidestep the PIN entirely to get at the funds in an attached prepaid account.
Google addressed the specific flaws right away and eventually offered a $5 credit to consumers affected by one of these issues, but its reputation suffered. The Mountain View, Calif., company's problems made it seem poorly equipped to handle the risks inherent in a new payment channel despite its years of experience in the payments space with its Checkout service.
The TxVia acquisition, announced Monday, can change that. TxVia owns a payments platform that allows card managers to set risk rules that take into account the specific attributes of mobile payments.
TxVia's platform is "flexible and nimble," says Madeline K. Aufseeser, a senior analyst with Aite Group. "It gives [Google] the ability to create add on-features and services that are specific to a digital wallet component."
Though payment-capable smartphones have built-in security that magnetic-stripe cards lack, people do not yet guard them as carefully as they do their regular wallets. For example, Apple (AAPL) had to change its policies for authorizing iTunes payments after users complained that kids were able to spend money within a Smurfs game without retyping the phone's iTunes password.
In mobile-based point of sale payments, TxVia's technology could help Google determine if there is "something wrong with that phone that's making the payment," Aufseeser says.
Google declined a request for an interview about the acquisition. It did not disclose the financial terms of the deal.
The acquisition is meant to boost the Google Wallet product, Osama Bedier, Google's vice president of wallet and payments, said in a blog post. In a statement posted to TxVia's website, Anil Aggarwal, TxVia's chief executive, said Google will leverage the payment company's technology to improve the way Google Wallet works.
Without the proper technology behind it, Google Wallet runs the risk of repeating the mistakes of its predecessor, Checkout.
Google Checkout launched in 2006 as a rival to eBay's (EBAY) PayPal. Its key benefit for merchants was its tie to Google's Adwords service. Merchants who used both services had some of their payment fees waived.
But in 2009, Google severed the products, making Checkout's pricing almost identical to that of its rival PayPal. Though Google supported Checkout even after this pricing change, it eventually folded Checkout into the Google Wallet product.
The TxVia purchase makes it less likely that Wallet will suffer Checkout's fate.
"To me, it says Google has more of a commitment to get things done right, because they have had a lot of floundering in the past," says Brian Riley, a senior research director in the retail banking and payments practice at CEB TowerGroup.