Apple Pay vs Google Wallet: How They Work

Apple (AAPL) and Google (GOOG) brands inspire almost religious devotion in their loyal consumers who see comparisons between the two tech giants as a comparison between apples and oranges. When it comes to Apple Pay and Google Wallet, our preliminary findings suggested they are mostly identical offerings: Apple Pay appears easier to use, while Google Wallet has a few more features. Further digging reveals that this is literally an apples vs. green-robot-persons comparison!

• Apple Pay and Google Wallet are Mobile Payment Systems.
• Wallet was launched three years ago, yet had possibly its biggest increase in use and adoption in the weeks following Apple's launch.
• Both systems allow contactless payment using NFC (Near Field Communication) technology, though their implementations are slightly different. Apple, with complete control over its hardware, has released Pay only on the iPhone 6 and iPhone 6 Plus (as well as a couple of iPads and soon on the Apple Watch), and uses their Touch ID technology for authentication.
• Google, on the other hand, opts for a more traditional PIN based authentication system. This makes Apple's system a little bit easier to use and significantly cooler to look at but allows Google's solution to work on older hardware, including Apple's own iPhone 5!
• Both Wallet and Pay can be used for online purchases straight from an app or website, automatically handling the entire checkout process with pre-filled defaults and only requiring PIN or Touch ID verification to complete the transaction.

Credit Card fraud has been a major problem in the U.S. As banks and retailers work to upgrade their platforms, mobile payment systems like Pay and Wallet may actually allow the U.S. to leapfrog to the forefront of payment security.

While both systems appear to be equally robust, the two companies do take different approaches that shape what their products can and cannot do. For the consumer, the use of Touch ID vs. PIN Authentication is the most visible difference, but behind the scenes, there is a lot more going on. Most important is the fact that neither system reveals the user's card details to the vendor.

With both systems, the user's card details are provided only once, during the initial setup. Google adopts an intermediary role and saves your card details on their servers. They then issue a virtual card to your device, the Google Wallet Virtual Card. When paying, the device only transmits this virtual card. The vendor never sees your real card, which is safely protected by Google's own secure servers. When the virtual card is charged by the seller, Google in turn charges your stored debit or credit card, being the only entity that ever sees your real card through this transaction.

Apple employs a different system known as Tokenization. Here, when your card details are provided to the device, it contacts the issuing bank directly and upon confirmation receives a device and card specific token called the Device Account Number (DAN) that is stored on a secure chip on the device. The DAN structurally resembles a credit card number and is the thing that is passed on to the merchant when any payment is made, and authorized in the usual way with the bank.

This seemingly small distinction makes all the difference. Since Google acts as an intermediary and stores your card details on its own servers, it does not need to worry about making any deals with the banks and practically any card can be added to your Google Wallet. In fact, you can even add loyalty cards and gift cards to your wallet, and send and receive money that can be stored in the Wallet and used directly without involving your bank.

In every single way, Google Wallet tries to replicate a real wallet in the virtual world. So much so that Google even tracks your transactions, saving order details, almost as if you stuffed your receipt into your wallet. This data will be used, as with all data on Google, to serve you ads that matter to you, which feeds directly into Google's business model. In keeping with its role as an intermediary, Google offers 100% security with its Google Wallet Fraud Protection policy.

Apple, on the other hand, explicitly declares that it will never track your transactions. In fact, Apple won't even store your card details on their servers or on the devices. All Apple does is transmit your card to the bank, authenticate with the bank and receive and store the DAN that the bank sends back.

Apple is not a payment intermediary, and is instead positioning itself as, true to its name, a payment medium alone. In essence, an Apple Pay enabled phone is an expensive and beautifully crafted credit card; one that can be lost or become useless if the phone battery dies.

Though fingerprint scan security and the ability to remotely disable the phone offer quite a bit of protection, if someone does get access to your Apply Pay phone, you have to take up the issue with your bank and not Apple.

This approach also means Apple must negotiate deals with banks and get them to sign-up for the payment revolution, a task that has limited the number of cards that can be used with Apple Pay at the time of launch. Not tracking transactions also means Apple has no way to monetize the user, and therefore it charges a per-transaction fee to the banks that it partners with, though the details of this fee structure remain somewhat murky.

Things get even more confusing when one wonders why banks will pay a per-transaction fee to Apple when Google's approach costs them nothing. Perhaps Apple has managed to convince them that its users will shop more with Apple Pay, or perhaps banks believe that they gain an exclusivity advantage over banks that are not partnered with Apple. Or maybe Apple just does a much better job than Google at coordinating the different stakeholders involved in such a complex and intricate network.

But despite Apple's considerable clout, all is not yet well with mobile payments. A consortium of vendors known as the Merchant Customer Exchange (MCX) that includes, amongst others, Rite Aid (RAD), CVS (CVS) and Wal-Mart (WMT), have declared that they will not adopt either Apple Pay or Google Wallet. Instead, they are working on their own alternative, CurrentC, which will save them considerable amounts of money by charging a customer's bank account directly instead of paying transaction fees to payment processors like VISA (V) and MasterCard (MA).

Neither Google nor Apple offers much to the vendors for adopting their systems; although at the moment the CurrentC system is very clunky, requiring the user to take a picture of a QR Code to pay, making its success winning consumers seem unlikely.

Apple Pay claims to be "your wallet without the wallet," a description that, in truth, fits Google Wallet better. And Google Wallet calls itself "an easier way to pay," which in all fairness is what Apple's ought to be saying. For the consumer, both systems make minor improvements in convenience and dramatic improvements in security. For the industry however, the tradeoffs are still very unclear.