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Google Wallet-Regulatory Implications

posted by Adam Levitin

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

A few things to note. First, integration of merchant-specific loyalty/rewards offers creates a value proposition for merchants with this payment method. But I wonder if this ends up like Groupon where more merchants want in than can get in. I don't want to get an SMS with a coupon every 20 seconds when I drive down Wisconsin Ave. into Bethesda. (Actually, I block SMS altogether, but that's another story.)  

Second, it's worth thinking a bit about the broader implications of Google Wallet.  In prior academic work, I've written about the impact of technological change in payments bringing in new parties to the payments ecosystem--device manufacturers, OS manufacturers, and telecom companies--and how that will mean more mouths to feed. The pie is growing as payments shift from paper to electronic, but checks and cash are pretty stubborn for a lot of consumers. And the Durbin Amendment certainly shakes things up.  

What I hadn't really thought about until today, however, was the regulatory implications of a company like Google getting involved in financial services. First, do we have a new type of too-big-to-fail problem emerging? If consumer payments migrate to mobile devices and Android and iOS and Blackberry dominate the OS market, are those OS makers financial institutions?  And separately, but relatedly, are they too big to fail?

Second, I see a whole potential bramble bush of antitrust and consumer protection problems emerging from mobile payments.  Guess where those issues go...  It's not going to be the FCC. Who knew that CFPB might end up regulating Google?  

And third,  how does this affect the political economy of financial regulation? Glass-Steagal's separation of finance and commerce had major political economy implications. Now we have the emergence of financial-information conglomerates. This phenomenon raises much more vexing problems than the concerns over bank safety and soundness being undermined by affiliate lending or unfair competition advantages for bank affiliates.  Instead, it raises a host of financial privacy issues. For example, how do we feel if I get discounts for financial services...if I agree to allow GPS location tracking of my movements? Or cookies that track the websites I browse? Or to receive targeted advertisements on my mobile device?

If you think that isn't a possible business model, look at how Amazon is pricing Kindle--there's a discount if you accept a version that displays advertisments (imagine ads that suggest a coffee break at Starbucks in between chapters...). These issues are going to force us to really think hard about the trade-off between the informational function of advertising and the manipulation function.   They're going to make us think hard about what sort of privacy we value and believe we are entitled. And they're going to make us think hard about the quasi-utility character of financial services and whether there should be regulation of the terms of access. I don't know the answers, but I think we payments junkies have years of fun ahead.  


I think "too big to fail" is a bit of a misnomer. The problem is more that the large financial institutions are too complex and interconnected to orderly liquidate or restructure.

It's difficult to foresee a situation in which a crisis of confidence prevents a tech firm like Google, Apple or eBay from getting funding because they A) don't rely on overnight markets for cash and B) don't have toxic assets on their balance sheets that would prompt investor/counterparty fears. That's not to say that big tech companies can't fail, rather, they can't fail nearly as quickly giving them time to divest or come up with a bankruptcy operation plan.

My concern is not about targeted ads. It is about the possibility for perfect price discrimination.

Here is my fear: I go into Best Buy to purchase a TV. Best Buy has contracted with Google Offers to offer users coupons who enter their store. If the person entering the store has recently searched on Google for TV prices, that person gets a 20% coupon to bring Best Buy's prices in line with the rest of the market. If the person entering the store has not done research, they get no coupon for TVs.

Although this sounds like it makes payment so much more convenient, I'm not sure I have sufficent faith in mobile technology yet to proceed with Google Wallet.

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