Google Wallet: An Interesting Solution To A Problem That Doesn’t Exist?

The early contender for the all-hype-no-action award so far in 2011 has been mobile payments, and while it still won’t be available until later this year, Google (NSDQ: GOOG) at least laid out a plausible plan Thursday for how we’ll soon be able to buy overpriced smoothies with our phones. A key decision to integrate with Mastercard’s existing wireless payment technology should help get the ball rolling, meaning we’re about to find out whether this is something real people actually want to use or something the payments industry is dying for us to embrace.

Google has traditionally operated with a go-big-or-don’t-go-at-all strategy, and Thursday’s event in New York was no different, with Google executives painting a picture of wireless NFC-based mobile payments on Android phones as the most significant shift in transactional history since coins gave way to paper money. The basic plan is what we’ve been expecting since Google chairman Eric Schmidt started talking about NFC (near-field communications) technology last fall: Android partners will start producing NFC-capable phones (the Nexus S is the only phone that currently works with the technology) that users can swipe at cash registers to pay for goods or services. The new wrinkle was that Citi and Mastercard’s PayPass system will be involved, meaning that Google decided to tap into an existing network of 311,000 wireless payment terminals installed around the world in businesses like gas stations and coffee shops in order to get the ball rolling.

And for those who don’t have a Citi Mastercard that hooks into the PayPass system, Google will have its own prepaid card within Google Wallet that you can add money to through existing credit cards: with a free $10 gift courtesy of Google’s cash hoard already in your account upon signup. A familiar list of businesses is working with Google to eventually accept Google Wallet, including Duane Reade, Walgreens, Peet’s Coffee, Radioshack, Subway, and Jamba Juice.

The motivation for introducing mobile payments are pretty clear. According to Mastercard, people who have received the 88 million PayPass-enabled cards in circulation spend more per transaction than those without the technology and use their cards more frequently for smaller purchases, meaning Mastercard gets transaction volume that would ordinarily fall to cash. Adding purchasing power to the mobile phone could increase that volume even more: Mastercard will now theoretically be tapping into a broader segment of the population that doesn’t have a credit card through banks that offer PayPass or that doesn’t even use Mastercard, as Google Wallet can be funded through any credit card.

That also means that businesses that decide to work with Google and Mastercard could see increased transaction volume, more revenue per transaction, or both. One interesting tidbit from Thursday’s presentation was the absence of Google Checkout from the equation, suggesting that Google understood it needed to partner with an established payment processor rather than attempt to force-feed Google Checkout down merchants’ throats, as it does in the Android Market.

From Google’s point of view, the wealth of transaction-related data that it could compile from such a service would give it a clear window into local purchasing habits, which then could be sold to advertisers to target Google users. Google said in an FAQ that “Google Wallet does not currently receive data about what products you purchase with it,” but at minimum the app needs to know where the transaction is being placed and how much was spent in order to send that information back to the bank. Just because Google doesn’t know that you bought $35 worth of Reese’s Peanut-Butter Cups at Walgreens doesn’t mean they can’t glean enough information through Google Wallet from a $35 purchase at Walgreens at 5:24 p.m. on Thursday in order to learn more about how people are spending money at businesses to help partners plan targeted ad campaigns.

Local business activity has been a huge priority for Google over the last several years, with Marissa Mayer heading up a new group focused specifically on local opportunities, and adoption of Google Wallet by those businesses further ingratiates the search giant into the local business market where companion products like Google listings and advertising can also be pitched. As growth in search advertising slows among established brands and companies, Google is targeting the hundreds of thousands of small businesses that don’t have much of an online presence. And it’s not alone: startups like Square are also hoping to convince businesses and users to use its mobile-payment technology in lieu of cash and credit cards.

Google Wallet also makes it easier for Google to enter the daily deals market, currently dominated by GroupOn and Living Social. Google Offers will provide Google with another outlet for local advertisers trying to draw traffic to their stores, and integrating it with Google Wallet could make it much easier to distribute and accept deal coupons at participating merchants.

Both Sprint (NYSE: S) and Google are betting that people will think Google Wallet is a reason to switch to Android devices. Only the Nexus S on Sprint will have the capability to use Google Wallet at launch, but Techcrunch reported after Thursday’s event that Google plans to distribute stickers that other phone users can affix to their devices should they want to get in on the NFC fun. As usual, Apple (NSDQ: AAPL) hasn’t commented on its plans for mobile payments although it’s understood to be considering the notion, and while Research in Motion’s latest BlackBerry Bold phones support NFC, they won’t be available until this summer and it’s not clear whether RIM (NSDQ: RIMM) has lined up the partners needed to make mobile payments work on the back end. (Wireless-carrier mobile-payments supergroup Isis would be a likely candidate).

The only potential problem to Google Wallet is that it in many ways seems like a solution to a problem that doesn’t really exist. It’s never been easier or more convenient for consumers to spend money as credit and debit card use becomes nearly ubiquitous in places like New York and San Francisco, where Google plans to first test Google Wallet. With people already a little concerned about the amount of personal information they can possibly share through their mobile phones, will they want to add account data to the list?

Sure, it’s kind of cool and futuristic to pay for things with a tap of a phone, but for the moment Google Wallet seems very much like something a consortium of corporations would really, really like you to use rather than a product the masses are clamoring for as to remove friction in the checkout line. With solid partners on board, Google has taken a good step toward making Google Wallet and mobile payments as easy to use as possible, but the transformation of the phone into the wallet won’t happen overnight.