Mobile payments: Can Google put all the pieces together?

At a press conference scheduled for today in New York City, Google is expected to lay out the beginning of something mobile-technology experts have been foretelling for years: using mobile phones to pay for almost everything via near-field communications chips, or NFC.

NFC is a chip technology that, when placed in two different devices, lets small amounts of data be sent over very short distances between them. This can include data such as credit card information, train ticket info, and a coupon bar code.

We already have credit cards with NFC chips inside, and some figure moving away from credit cards to paying with a phone is the next step. Rumors have swirled that Apple has been hatching a plan to turn the iPhone into a mobile credit card via iTunes for over a year. Amazon.com is reported to be considering such a service, as have some credit card and wireless companies.

But talking about NFC and actually making a usable service for consumers happen with phones are two different things. Different companies in different industries need to work closely together for it to work in a straightforward manner for mobile phone users. That includes phone makers, mobile software companies, wireless service providers, banks, retailers, and makers of payment terminals.

That challenge -- as much of a management issue as it is a technological issue -- helps explain why no one has done it on a wide scale yet.

Google is perhaps best-positioned right now for instituting a mobile-payments system for several reasons: First, Google already makes one of the two phones in the world with NFC chips inside, the Nexus S (Nokia makes the other, the C7) and is likely to make more. Second, Google also has its own software, Android, which it can configure to the advantage of NFC chips in a phone. Thanks to Android, Google enjoys relationships with carriers too. Reports indicate it's planning to launch the NFC service for "select" phones on Sprint.

Retailers are a different story. They need to be able to accept a transaction via a phone. And while Google does not necessarily have connections with a wide variety of traditional retailers in the way it does with consumer electronics and communications companies, other outfits like Verifone and VivoTech could help.

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Reports surfaced in March that Google will partner with those two companies, which provide payment terminals to retailers, in major cities like New York and San Francisco. VivoTech specifically makes "contactless" payment terminals, which allow phones to be waved at a device on or near a register and record a transaction.

This part of building out a mobile-payments ecosystem in the U.S. isn't a huge obstacle. Many retailers, like McDonalds and Home Depot, already have contactless payment readers at every terminal for credit cards equipped with NFC chips. Most retailers that don't can get one and upgrade their current terminal software rather than buying a whole new system. It is possible Google and Verifone together could subsidize the installation of the terminals for retailers who want to participate.

Advertising could ease transition
Another way Google could help ease retailers' transition to a new way of receiving payments is through advertising. Google could place ads somewhere along the payment process, say when a customer is entering his or her personal identification number to pay for something on their phone.

The value of that ad could offset the cost of the transaction for, say, a grocery store, which may make 1 percent to 3 percent profit margins on the items it sells, while normally paying anywhere from 1 percent to 3 percent transaction fees when it swipes a credit card, says David Eads, vice president of product marketing at Kony Solutions, which looks to help retailers accept mobile payments through a variety of methods.

In that scenario, if a shopper making an NFC payment through an Android phone was a better deal for the grocer, that store "could have incentive to get users to pay with Android phones," says Eads.

Some credit card companies are reportedly on board. The Wall Street Journal said earlier this year that Google would let Android phone owners connect a Citibank or MasterCard account to their phone for mobile payments.

The company may or may not go into detail about the full extent of what it's working on tomorrow. It's believed Google is working on a total digital wallet system. That means that besides equipping a smartphone with NFC service that pays for things, Google may also let shoppers receive coupons and cash them in, and earn rewards points from retailers, all kept on the phone.

Google could let retailers offer coupons to customers through the NFC service and facilitate targeting of those deals and ads based on the information gathered through its service.

Google wants to make money on this, but it's likely not getting into NFC payments for the transaction fees, says Todd Ablowitz, mobile-payments consultant for DoubleDiamond Group. It's most likely that Google wants a portion of the discounts or coupons it helps retailers deliver to their customers, he says.

That may not be ready quite yet. So even if the payments technology is the extent of what Google announces today, many industry experts will be pleased that the first steps are being taken. After all, this has been a long time coming.

"It's a good first step. It will probably have limited reach, starting in a few cities and focused on a few retailers and there aren't a lot of Nexus S out there," said Eads of Kony. "It may start small but will continue to grow."