Google Admits Defeat In Its 7-Year Battle With Amazon And PayPal

Google just announced that is it is shutting down Google Checkout, a Web-based payments system it launched to great expectations seven years ago.

It will continue to offer Google Wallet and handle transactions for apps, games, music, and movies on the Google Play store. But Google is largely getting out of the business of processing payments for physical goods and services.

Google Checkout may have had great expectations, but it delivered little in the way of results. Amazon and eBay's PayPal continue to dominate e-commerce, with a host of lesser-known players also doing the digital scutwork of processing credit-card transactions online. (Two of those, Braintree and Shopify, are offering discounts to former Google Checkout customers.)

Google does billions of dollars a year in credit-card transactions. But most of that is for a purely digital product: online ads purchased by small businesses.

How Google Did Not Get Ahead In Advertising

The theory has long been that Google could use the sheer bulk of these money flows to get into other parts of the payment business, first with Google Checkout, later with Google Wallet.

That theory has not worked out in practice. Where Google has a captive market, as with its ad products or the Google Play store, it's a natural thing for it to handle payments. Where Google has had to compete in payments, it has struggled.

What's Google left with? Google Wallet, a confusingly named product, is now much more of a wallet. In instances where developers use its new mobile-app payment feature, Instant Buy, to sell goods to smartphone and tablet users, Google essentially just stores a credit-card number and passes it on for processing. For Web-based merchants, Google Wallet will store coupons and help drive traffic to online stores.

And in the handful of physical retail locations that take Google Wallet, the tap-to-pay feature available on some Android smartphones will work. Google never actually processed these payments—it just passed on a card number to the merchant, who used some other service to actually handle the transaction.

Missing The Bigger Opportunity

But Google is missing out on a much bigger opportunity—which is serving as an alternative to Amazon.com for the whole world of commerce as mobile, digital, physical, and virtual collide.

It's not clear, for example, what will happen to Google Shopping Express, an experimental same-day delivery service Google is testing in the San Francisco Bay Area. That relies on Google Wallet to process payments for physical goods—exactly the business Google has said it doesn't want to be in anymore. A Google spokesperson tells us Google Wallet will continue to be an option for Shopping Express.

The real prize for Google in being a player in the payments world is data—data about what advertisements and experiences lead to transactions. The risk is that Amazon and PayPal, by handling more kinds of transactions than Google is willing to do, including traditional e-commerce, will attract more merchants. Or that merchants will simply sign up with a payments processor and leave Google out of the equation altogether.

While Google's not completely of the payments game—and one should never count the monolith of Mountain View out—it feels like Google is taking a big step back from the money business. Whether its bet on digital and mobile payments is a tactical retreat or a strategic defeat might not be clear for years.

Updated with comment from Google on its Shopping Express same-day delivery service.