Google Gave Up Retail Payments To Get On iPhone. Where Does That Leave Retailers?

Why did Google (NASDAQ:GOOG) give up on in-store payments with Google Wallet? Well, that's what finally made it possible to get Wallet on iOS and on Android phones from mobile operators Verizon, AT&T and T-Mobile, which it finally managed to do last week. The NFC-based ability to mimic a contactless payment card had to go? It's gone, at least for those phones—the vast majority of smartphones, remember. That was essential for Google to turn a profit on this lose-money-on-every-transaction project. In the end, it was inevitable: To get rid of that bottleneck, in-store NFC payments had to go.

But beyond business expediency, there's something more structural going on here: The only reason big retailers have a use for alternative payments is to get rid of Visa (NYSE:V) and MasterCard's (NYSE:MA) interchange. That's it. Big chains already have a very functional in-store payments system. It just happens to be very expensive. Google Wallet didn't actually have a way to cut that expense, so big chains had no use for it. And once Google finally realized that, Google no longer had a use for big retailers.

Let's be clear: There's no hostility here (at least none we've heard about). The mutual lack-of-a-use is just about payments—lots of retailers are happy to turn to Google for search or maps or ads. Google, for its part, is now focused on helping consumers do things like money transfers. With a big enough user base, Google can actually make a payments business of sorts that way.

And if there's one thing that's now crystal clear, both from Google's experience and the distinct lack of respect Isis has gotten from some retail "partners" it's that for big chains, payments are about interchange. Period. Any new payments offering has to not only deal with that reality but make it central to the pitch.

That may be why Apple (NASDAQ:AAPL) has been so slow to become a payments player, even though it keeps filing those tantalizing payments-related patent applications. Remember, except for MCX, Apple is the only would-be payments player with a chain of stores. (No, the mobile operators don't count—the people running their little stores aren't the same people involved in the Isis consortium.)

Apple's stores have been officially run by CEO Tim Cook for the past year. He knows exactly how much they save by doing payments electronically instead of through mag-stripe swipes. He also knows how much they pay in interchange. And it's pretty clear that there's no comparison.

So what now? It's effectively a retail payments reset. Isis hasn't heard the news yet, but Isis also hasn't set a date for its national rollout—which it will have to do without half of its original payment-card issuers, now that Capital One and Barclaycard have pulled out. And while PayPal (NASDAQ:EBAY) can keep trying new ways to dazzle small merchants so they'll at least try in-store payments, meaningful volume isn't there either.

Maybe MCX will actually deliver its payment system soon—presumably with Walmart (NYSE:WMT) as a giant testbed, and presumably using ACH direct-debit instead of Visa and MasterCard. Or maybe PayPal or Apple will start pushing their users much harder to shift from payment card numbers on file to bank account numbers. That would start taking interchange out of the system, and could give Apple a reason to get interested in retail payments again.

Who knows, maybe some large retailer will reinvent the closed-loop charge card for the smartphone era.

Or maybe there's going to be a much longer pause. Right now, a whole collection of judges are deciding how to cap debit interchange, whether the card brands' rules setting credit interchange are legal, how arbitrary PCI fines are allowed to be, and if Visa and MasterCard's corporate structures by themselves are violations of antitrust law.

If that holds out the hope to big chains that interchange could be effectively swept away, it's possible that everything will be frozen for a few years, while the unsuccessful retail payments efforts lick their wounds and retailers look to the courts for a big interchange cut.

Just remember: Laws and courts have forced Visa and MasterCard to change their business model twice before. And each time, they've ended up getting more money from retailers.

In that light, that reinvent-the-charge-card idea starts sounding better all the time.