Android Pay Vs. Apple Pay: Google Has Advantages, But Business Deals Will Win Battle

With Google Inc.’s announcement of Android Pay Thursday, the first major direct rival to Apple Inc.’s Apple Pay came into focus. While other Apple Pay competitors are already in the market or soon will be—handset giant Samsung Electronics Co. Ltd. and the retailer-controlled Merchant Customer Exchange LLC are expected to launch their services by fall, for example—none enjoys the market heft in phones and operating systems wielded by Google.

So how serious a threat is Android Pay to Apple Pay? One thing is clear: the battle ultimately will be won by factors such as marketing, pricing, and card agreements. “Everybody’s wrapped up in the technology, but it’s the business relationships that are going to shape this [comparison],” says Tim Sloane, vice president of payment innovation at Mercator Advisory Group Inc., a Maynard, Mass.-based payments consultancy.

This is where Apple Pay, which launched seven months ago, has already piled up a huge lead. Some 276 financial institutions have established technical connections to Apple Pay and have agreed to Cupertino’s contract terms, triple the number three months ago. Apple also now enjoys a wide advantage in consumer awareness and usage over Android Pay, which may not even become operational until several months from now.

Indeed, the overwhelming publicity Apple’s formidable marketing machine has generated for the service has not only helped sell Apple Pay, it has allowed the service to almost single-handedly establish near-field communication as a de facto standard for in-store mobile payments, even though NFC had floundered for years before Apple adopted it.

Yet Google holds several key advantages as well, not least the huge installed base of smart phones powered by the Android operating system. The KitKat and Lollipop versions of Android, which are the versions that can support Android Pay and NFC, account for 49.5% of Android devices, according to Google data. Given Android’s dominance in the mobile OS market, that would translate to about 26% of U.S. smart-phone subscribers, by Digital Transactions News estimates. By contrast, the Apple devices that work with Apple Pay, iPhone 6 and 6 Plus, account for about 8% of U.S. subscribers, according to these estimates.

Google has also attached a rewards feature to Android Pay, a component missing—so far—from Apple Pay and one many merchants want in a mobile-payments service. If it works as expected, the feature will let consumers earn and redeem rewards at the same time they are tapping their phones to pay for goods at the register.

Yet in many respects, the two services are much alike, or will be once Android Pay launches. Both support in-app transactions, both rely on NFC for brick-and-mortar payments, both use fingerprint authentication and tokenization of card credentials, and both let users load their cards from participating issuers into the wallet, for example.

Still, for all its apparent advantages, plenty of questions linger about Android Pay, some of which have to do with both technology and those all-important business arrangements. For example, Google confirms the service will rely on a form of NFC called host card emulation. This move could help in the effort to sign up banks. Issuers like HCE because it allows them to load wallets without the need to access a secure element embedded in the phone that’s usually controlled by a mobile carrier.

But HCE comes with its own complications. Its cloud configuration is considered riskier than NFC based on a secure element, the option Apple has adopted, and can prove problematic when cellular coverage is spotty. The technology can also involve considerable time and cost.

“If Google implements payments as an HCE application, then it will take banks many months and a significant investment to deploy the solution,” notes Sloane. “And they will want to see someone else test this solution first or be indemnified from the risk.”

Another question mark is what Samsung will do with Android Pay when it launches its own wallet, called Samsung Pay, later this year. The Korean electronics giant controls 28.3% of the installed base of U.S. smart phones, according to market researcher comScore Inc., most if not all of which runs on Android. “Will Samsung willingly update my Galaxy Note to support [Android Pay]?” asks Sloane. “What’s in it for them?”

Android Pay’s rewards advantage could also lose force over time. Right now, this is “the big difference” between Apple Pay and Google’s entry, says Deborah Baxley, principal at Capgemini Financial Services’ Cards and Payments practice. But Apple is reportedly planning to introduce a rewards feature for Apple Pay next month at its developers’ conference.

Google may need to tread carefully. Merchants balked at Google Wallet in part because of the marketing data Google tried to collect through it, and some observers feel much of that distrust lingers. “You can be sure there will be rewards aplenty, but the question is who pays for them?” asks Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy that has closely followed mobile wallets, in an email message. “And, of course, what happens to the data?”

At the same time, merchants are struggling with sensory overload at the point of sale these days. “If Google thinks loyalty and rewards will influence merchant adoption over the next six months, they haven’t talked to enough merchants,” says Sloane. “Merchants are buried by EMV, NFC, debit routing, Apple Pay, and other payment-related issues and have no bandwidth left.”

That may be true, but the ongoing rollout of EMV chip technology is doing much to equip merchants with NFC capability, which can only help both Apple Pay and Android Pay. Both Apple and Google boast that some 700,000 locations can accept their mobile-payments services—though a significant percentage of those locations are self-service devices like vending machines.