Well, we knew it was a possibility, and given Google Wallet's painfully slow adoption rate (by carriers and payment processors), rumors today from NFCTimes that the service's sole remaining partner Sprint is coming up with an alternative aren't exactly surprising.
NFCTimes says the service will be called "Touch," and will utilize a "secure element" system like Wallet (a physical chip) in order to securely process mobile payments. Likely by necessity, this would mean the end of support for Google Wallet on Sprint handsets released after the launch of the new "Touch" service. Two embedded payment systems would be confusing to average consumers, and Sprint will have much more control over its own service (as well as revenue from it), as compared to no control with Google Wallet - undoubtedly something it wants.
Carriers haven't been willing to adopt Wallet, basically, for those exact reasons - lack of control, and lack of financial incentive.
As you probably know, AT&T, T-Mobile, and Verizon are all heavily invested in the ISIS mobile payment platform, while Sprint has remained the lone holdout with Wallet. Unfortunately, Wallet simply hasn't lived up to expectations. Payment processor support remains limited to MasterCard, with word on VISA and AMEX compatibility basically having gone silent. The news of Touch is just another nail in the increasingly inevitable coffin of "Wallet 1.0."
Security concerns plagued Wallet earlier this year (justified or not), and the continued unwillingness of other carriers to implement the service has essentially left it orphaned.
Companies PayPal and Square have begun launching competing services that don't require NFC hardware at all. Google has apparently been considering such a "carrier sidestep" internally, though no announcements about changes in the way which Wallet will work have yet been made. The fact is, Google will have to fundamentally change the way Wallet functions at this point, because there's just no way the carriers will support it now.
Wallet's future likely involves a renewed focus on gaining merchant support, and use of backend processing on Google's servers to ensure payments are secure and authorized. Google's dream of a native, hardware-secured Android mobile payment system has now been all but squashed, and it's going to need some serious reworking in order to get back in the game. It's possible an announcement of just such an overhaul could be coming at Google I/O later this month.