Android has undoubtedly been a success. Since its release, the mobile OS has grown to become the most popular computing platform in the world. Now, Google (NASDAQ:GOOGL) (NASDAQ:GOOG) is taking a similar approach with mobile payments, announcing Android Pay at Mobile World Congress last week.
Android Pay is less than a full-formed service compared to Apple (NASDAQ:AAPL) Pay or Samsung (NASDAQOTH:SSNLF) Pay. Instead, it's an Application Program Interface, or API, that makes it easy for developers to implement their own payments system into apps. This opens the door for dozens of smartphone makers to implement their own payments services similar to Apple's and Samsung's.
Why Android Pay could succeed
Just as the Android operating system has succeeded by making it inexpensive and easy for hardware manufacturers to create smartphones and tablets, Android Pay could succeed on the same merits. Manufacturers can use Google's API to implement the secure tokenization and storage of credit card information in their own payments service.
Android Pay's predecessor, Google Wallet, failed to catch on for several reasons, but they all boil down to one thing: It wasn't well integrated with the OS and hardware. Carriers blocked the app's ability to access the NFC chip, and didn't allow Google to pre-install the app on Android phones. Smartphone manufacturers didn't support the app, either.
Android Pay allows for deeper hardware integrations, specifically with fingerprint scanners. It provides a framework for manufacturers to develop their own payments apps, and keep up with Samsung and Apple.
With the two leading smartphone makers pushing their own platforms, there's bound to be a bunch of other OEMs looking for an inexpensive solution like Android Pay.
What it means for Google
Google isn't just offering Android Pay out of the kindness of its heart. The company expects to get something out of it -- specifically, data.
While Apple's big pitch for Apple Pay is that it doesn't collect data on its users' purchases, Google is making no such promises with Android Pay. Wide adoption of Android Pay as a back end for various mobile payments platforms means Google could get a lot of valuable purchase data from hundreds of millions of Android users. Google could feed that data into its ad targeting, making its display ads more effective, and increasing their average price.
Apple and Samsung take a cut of every purchase as a processing fee for their respective payments platforms. That model simply won't work for Google if it wants manufacturers to adopt Android Pay. Developers will avoid paying the additional fee, and manufacturers won't be able to monetize their payments systems if Google is already taking a cut.
Luckily, Google runs the largest ad platform on the web. Last year, the company generated nearly $60 billion in ad revenue -- 89% of its total revenue. However, average ad prices have declined as more impressions come from mobile devices versus desktop computers. Feeding more data to its advertising platform is the key to increasing average ad prices.
The Android of mobile payments
I expect Android Pay to become more prolific than Apple Pay for the same reason Android OS is more prolific than iOS. Implementing Android Pay is easier than building a payments platform from the ground up, just as implementing Android OS is easier than building an entire operating system. Similarly, the cost to use Android Pay is zero dollars versus the minimal patent-license required to install Android on a smartphone or tablet. This makes it incredibly attractive to smartphone OEMs that are already struggling to turn a profit of any sort, and can't afford to pay for licenses or buy new technology.
At the same time, I don't expect it to impact sales of iPhones dramatically, as Apple Pay is still in its infancy, and hasn't developed into a major selling point.