June 2, 2011, 2:31 PM

Humbling a giant

For Google Wallet to succeed many small merchants will need a reason to invest.

Lead Photo

Merchants will need contactless point-of-sale readers for the scheme to work.

Floyd’s Coffee Shop was the groundbreaker, the first small business to participate in Google Inc.’s Google Offers, a daily deal program.

Wednesday, the Portland, OR-based coffee shop offered $10 of products for $3 in a deal consumers could purchase on Google.com/Offers. Eventually, Google will incorporate the daily-deal program into its mobile commerce scheme that includes Google Wallet, a contactless payment service that company will launch this summer.

Google Wallet relies on Near Field Communication, a wireless technology that enables devices to exchange information—including payment card data—over a short distance. It will enable a consumer to pay for goods in a store by waving a smartphone with an NFC chip near an NFC-enabled terminal. NFC uses a merchant’s point-of-sale system to initiate and authorize transactions. But NFC transactions require merchants to upgrade point-of-sale system hardware and handset makers to embed NFC chips in mobile phones. Initially available on Google’s Nexus S phones on the Sprint network, Google Wallet will be free for consumers and merchants.

While daily deal offerings are exceptionally popular with consumers and businesses, persuading either group to embrace Google Wallet could be challenging. Just focusing on the merchant reveals some potential obstacles.

A merchant will have to buy a NFC-compatible contactless reader, find a spot for it on the countertop, ensure his point-of-sale system knows what to do with a Google Wallet transaction and train his staff. Some POS terminals  have built-in readers while others may just need a module attached to them. Regardless, some piece of equipment has to be able to work with NFC-compatible payment devices.

The biggest challenge may be the cost in time and equipment. A quick online search found contactless readers selling for $200. Many small merchants are not willing to buy new payment equipment unless there is clear evidence the money can be recovered quickly.

Google’s success is dependent on wide scale adoption. As Forrester Research recently noted, the value for Google in Google Wallet and Google Offers is the in data behind the payments. But if merchants are reluctant to buy a contactless reader and train their employees, there won’t be any data generated at the point of sale.

There’s a lesson from a few years ago that Google can learn from, especially if the company wants to see success among the country’s five million small merchants, as estimated by Visa Inc.

In the mid-2000s such major card brands as Visa Inc., MasterCard Inc. and American Express Co., debuted contactless payment schemes, and some banks joined in, issuing credit or debit cards containing the contactless chip and antenna that lets a card communicate wirelessly with a reader. While banks could put contactless cards into their customers’ hands, the whole scheme relied on cardholders having a place to use these cards. While some mid-size and large merchants, such as convenience store chain Sheetz Inc., Walgreen Co. and McDonalds, installed contactless readers, it was much harder to convince smaller merchants.

Many simply did not want to spend the money, especially if only a small number of their shoppers had a contactless card.

What should Google do? Should it buy a contactless reader for each participating merchant? That’s one option. I suspect the better choice is to ensure merchants understand the reasons for accepting Google Wallet transactions. Failing to do so could prove humbling.

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