Android Pay resembles Apple (AAPL 0.74%) Pay and Samsung (NASDAQOTH: SSNLF) Pay in terms of functionality. Owners of most modern Android smartphones can use the Android Pay app and the NFC chips embedded in their handsets to make purchases at various merchants.
Android Pay is remarkably similar to its predecessor, Google Wallet, which predated both Apple and Samsung Pay by several years. Yet Android Pay looks to have a much better chance at succeeding.
Google renames the Wallet app
Owners of some Android handsets have been able to make NFC payments for more than four years. In September, 2011, Google launched Google Wallet, its first mobile payment service. Google Wallet offered tap-to-pay functionality virtually identical to Apple Pay and Android Pay, but it failed to catch on.
Today, NFC terminals are somewhat rare. According to the Aite Group, just 28% of credit card terminals were equipped with NFC technology at the end of last year. But they were exceptionally rare when Google Wallet made its debut -- just 4% of terminals had NFC technology in 2012 (via NFCWorld). If you think Apple Pay is somewhat useless today, imagine using Google Wallet three years ago.
An equally significant problem was carrier resistance. Only Sprint supported Google Wallet -- the rest of the major carriers did not. As it was initially conceived, Google Wallet required access to a device's secure element. Android phones sold by Verizon, AT&T, and T-Mobile blocked access. Google came up with a solution in 2013, using a technology known as Host Card Emulation, but not every flagship Android device supported it, and users would have to go through the trouble of downloading the app.
Now, Android Pay will come installed on every Android smartphone, and all the major carriers are on board. NFC terminals are growing in popularity, and are expected to represent about 90% of credit card terminals by 2017.
Google Wallet is sticking around -- sort of. While the old Google Wallet app has been renamed Android Pay, a new Google Wallet app is available to download. Rather than facilitate merchant purchases, it offers a way for individuals to transfer money over the Internet to their friends and family.
Google isn't taking a cut
Apple directly benefits from Apple Pay, as it pockets 0.15% of each transaction. Android Pay, however, does not give Google the same benefit. The search giant isn't collecting anything from Android Pay transactions. If Android Pay does catch on, Google could derive some revenue from coupons and rewards programs offered by merchants to Android Pay users.
But the most significant benefits are likely to involve the larger Android ecosystem. Offering Android Pay helps Google keep pace with its rivals. Apple Pay may not be a killer feature today, but in the future, when NFC terminals are commonplace, it could be seen as a smartphone necessity. Without a proper counter offering, more smartphone buyers could turn to the iPhone. It also ensures that Samsung isn't the only Android vendor with a mobile payment offering. Samsung Pay is arguably superior to both Android Pay and Apple Pay, because while it supports NFC, it doesn't require it. Yet it's currently exclusive to Samsung's recent crop of Galaxy smartphones. In the absence of Android Pay, other Android hardware vendors would have to create their own payment solutions, or risk losing market share to Samsung.
Android Pay isn't a major step forward for the search giant, but its existence is necessary to keep the Android platform competitive.