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Google Checkout - Why is Google getting into the payment business?

Google launched an on-line retail payment offering in June, 2007, targeted at Google AdWords customers. Prior to launch, there was much industry buzz around Google entering the payment marketplace, and a belief that Google was going after PayPal’s core business of enabling payments for on-line auctions.

In fact, their motivation seems different than what was first suspected. What Google really seems to be up to is selling more advertising to its AdWords clients.

Let’s take a step back here. For those of you who may not know exactly how Google earns their revenue, they effectively auction off search words to the highest advertising bidders. The more popular the given search words are, the more an advertiser has to pay in order for their ad to appear high up in the list of sponsored links returned from a Google search. The sponsored links are the ones that show up on the right hand side (and at the very top) of the Google search results page. So, if you do a search for “credit card offers” on Google, someone has paid a pretty price to have their sponsored link appear in your results page.

Each time a user clicks on one of the sponsored links, they pay fees to Google. The more real business that Google can deliver to an advertiser, where the user not only links to the advertiser site, but actually buys something there, the more effective Google is at what they do and the more in-demand their services become.

One thing that on-line merchants hate is shopping cart abandonment, where the user gets all the way to the checkout process, but never completes the transaction. There are lots of reasons why a user does this, but one of the reasons is that they don’t have sufficient confidence in the security of the merchant that they are on-line with to give up their credit card information to them. Google Checkout helps with that problem.

How Google Checkout works

Consumers sign up for a Google Checkout account. This is where they enter all of the information that they typically have to enter at shopping card checkout time with on-line retailers. Google asks them for the usual stuff:

  • Name
  • Address
  • Various shipping addresses
  • Email address
  • Credit card information
  • Username and password

When a Google Checkout user shops at a merchant that accepts Google Checkout for payment, instead of entering all of this same data at the merchant site, they just access their Google Checkout account instead. Google Checkout is fully integrated into the merchant shopping cart experience, so it’s an easy system for the shopping consumer to learn and use. Also, since it’s a consistent checkout process every time for the consumer, they don’t have to deal as much with how each unique on-line retailer shopping cart experience works.

Google hopes that this all results in more people buying items from their AdWords clients, fewer dropped shopping cart experiences and more AdWords advertising spend from the online retailer to Google.

Aside from being integrated at the shopping cart level, Google has also created payment and tracking history screens for Google Checkout purchases. Instead of the consumer going back to the various e-tailer sites to check the status of previously placed orders, they can simply login to their Google Checkout account and see all of their transactions in a single place.

While this feature has its benefits, it also has a downside in that it can create some disintermediation between the e-tailer and the consumer. If the consumer goes directly to the e-tailer website to check for transaction status, like they did before using Google Checkout, they may not find the same kind of information under their account profile there that they saw in the past. So, this part of the service can tend to make the customer feel a step removed from the merchant and could cause issues in cases where the consumer prefers to interact more directly with the merchant.

You can tell that a merchant is a Google Checkout merchant if you see the Google Checkout logo in the Google sponsored link results.

googcheckoutsample.jpg 

Google has stated that their motivation is less about making money on the payment transaction service itself, and more about driving additional business to where they historically have made their revenue, namely, their search engine.

While it is expected that over time that Google will enable ACH payments within Google Checkout, today a consumer can only register credit and debit cards with them.

Google Checkout Pricing

During an introductory period, Google is offering free processing to e-tailers through the end of 2007. Beginning in 2008, Google AdWords buyers can still get their payment processing for free for any Google Checkout sales up to 10 times their monthly AdWords spend. That means if you spend $1 each month on AdWords, you can process $10 in sales the following month for free.  Any payment processing beyond that will cost 2% plus $0.20 per transaction. There are no monthly, setup, or gateway service fees.

Google Checkout fee schedule

In March of 2009, Google announced a change to their pricing schedule, apparently eliminating the previous credit that their Adwords customer received.  Scott Loftesness from Glenbrook partners wrote a brief article that elaborates on the fee change.  Google's new pricing schedule seems to closely parallel the fees that PayPal charges.