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The Google Wallet has “several promising aspects,” but must overcome a number of hurdles to reach mass adoption, said U.S.-based research firm Gartner.

Gartner veteran analysts Mark Hung and Avivah Litan said in a research note yesterday that Google’s business model for NFC bodes well in that it won’t try to change the payment relationship among banks, processors and merchants or try to take a cut of the payment transaction.

Another advantage of the initiative is that it is set up to support card accounts from multiple banks. And it enables merchants to connect their online and mobile advertising directly to purchases in physical stores, through the Google Offers service, which is part of the wallet.

“Nevertheless, it (wallet) risks ending up as disappointing as previous initiatives in this area, such as Google Checkout,” said the analysts.

The business case for merchants is unclear, said Gartner, especially since the payment transactions consumers conduct from the wallets will not require that they enter a PIN, like contactless card transactions.

“Merchants typically pay higher interchange fees for PIN-less contactless payments than they do for swiped-card payments that use a PIN at the point of sale,” said the analysts. The Durbin amendment will lower PIN debit transaction fees even more in the United States, they noted, making the difference even larger with PIN-less transactions.

“They (merchants) also must pay for POS reader upgrades to support the NFC payments,” said Gartner. “Merchants will not agree to higher fees and new infrastructure investments unless Google Wallet generates more sales and revenue.”

Google is believed to be subsidizing at least part of the cost of terminals for several major merchants, including the Subway sandwich chain, Walgreens retail pharmacy and Macy’s department stores, sources have said.

But other merchants probably would be expected to fund their own terminals, though Google’s executive chairman and former CEO Eric Schmidt said earlier this week he believes credit card companies should pick up costs for upgrading merchant terminals because of the lower fraud rates on NFC transactions compared with magnetic-stripe cards.

The first applications in the wallet will be a credit card account issued by Citi and a Google prepaid card account that can be funded by other credit cards. Google does not plan to charge consumers top-up fees. Both payment applications will support MasterCard PayPass, which is now accepted at more than 124,000 PayPass terminals in the United States.

Other analysts have noted that Google is only proposing one phone to start with, it’s Nexus S 4G model sold in connection with mobile carrier Sprint. While there are expected to be other Android phones that support the wallet, it appears unlikely that non-Android phones would be able to carry the services for the foreseeable future.

Google has talked about making an “NFC sticker” available for users of non-NFC phones, though this would probably be a passive sticker with no direct connection to the wallet.

“This will be a slow incremental value-add for the consumer, limited by the number of mobile devices with NFC capabilities and the initial low level of merchant locations equipped with reciprocal reading devices,” said Yankee Group senior analyst Nick Holland last week. “However, it signals the start of the next generation of consumer interactivity.”

Gartner analysts Hung and Litan also see resistance, at least initially, to the wallet from the thee other major operators in the United States, AT&T, Verizon Wireless and T-Mobile USA, which formed the Isis joint venture last year. The Google Wallet would compete with their planned Isis wallet.

Isis has recently recast its strategy and is no longer planning to launch its own payment scheme. Instead, it would earn revenue from charging fees to banks to put their applications onto secure chips in phones sold by the carriers. It would also earn revenue from merchants and other advertisers for delivering offers.

“But they (telcos) appear to be having difficulty with formulating a business model for Isis that appeals to all parties: banks, merchants and the carriers themselves,” said the analysts. “Gartner believes these carriers will have to quickly create a monetization strategy or consider disbanding Isis and deploying Google Wallet instead.”