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Why this matters: The planned payment system would allow Google to offer retailers more data about their customers and help them target ads and discount offers to mobile-device users near their stores.

Google Inc. is teaming up with MasterCard Inc. and Citigroup Inc. to embed technology in Android mobile devices that would allow consumers to make purchases by waving their smartphones in front of a small reader at the checkout counter, according to people familiar with the matter.

The Internet giant is aiming to make mobile payments easier in a bid to boost its advertising business. The planned payment system would allow Google to offer retailers more data about their customers and help them target ads and discount offers to mobile-device users near their stores, these people said. Google isn’t expected to get a cut of the transaction fees.

The project, which is in its early stages, would allow holders of Citigroup-issued debit and credit cards to pay for purchases by activating a mobile-payment application developed for one current model and many coming models of Android phones. The idea is to turn the phones into a kind of electronic wallet.

These phone users also would be able to get targeted ads or discount offers, which Google hopes to sell to local merchants. They also could manage credit-card accounts and track spending through an application on their smartphone, the people said.

The venture also involves VeriFone Systems Inc., which makes credit-card readers for cash registers. VeriFone would roll out more so-called contact-less devices, or readers that enable consumers to pay with a wave or tap of a credit or debit card. The readers also would allow people to pay by tapping their smartphones, said the people familiar with the matter.

The credit-card readers involved all use “near field communication” technology that is already in place at thousands of merchants nationwide. Today, customers who have credit cards embedded with that technology have the option of waving a card in front of a reader, instead of using a traditional swipe method.

Google’s Android mobile-device software, which powers hundreds of different devices, supports this technology.

The planned payment system would be unlikely to put consumers at any greater financial risks. As with conventional credit-card transactions, the card companies would cover the cost of unauthorized purchases. Nor is the NFC technology itself particularly vulnerable.

“Because it’s contact-less there’s a perception people can grab it from thin air, but it’s actually a more sophisticated technology than credit cards with a magnetic stripe, making it more difficult to steal a consumer’s payment information,” said Nick Holland, a mobile-transactions analyst at Yankee Group.

The Google-backed system, which is expected to be released this year, marks the latest effort to broaden the uses of smartphones for everyday activities—from chatting to emailing to shopping. The telecom, technology and financial-services industries all are looking for strategies to make them leaders in the evolving business of getting consumers to pay for products with their phones. Offering that option could allow device makers such as Apple Inc. to sell more of their phones.

Wireless carriers Verizon Wireless—a venture of Vodafone Group PLC and Verizon Communications Inc.—AT&T Inc. and T-Mobile USA said last fall that they would team up on a venture, dubbed Isis, to enable customers to pay for goods with their smartphones. Discover Financial Services Inc. will process those payments, potentially eliminating the need to carry cash, credit and debit cards, reward cards and transit passes.

Google’s move is part of its quest to sell ads and other services to local retailers, a growth frontier for Internet companies. Google executives, including outgoing Chief Executive Eric Schmidt, haven’t been shy about saying that Android devices could serve as payment facilitators, thanks to NFC technology, though they haven’t specified what Google’s role will be.

“A phone is a lot smarter than a card,” said Doug Bergeron, VeriFone’s chief executive, in an interview. “It opens the door to a rich experience at the point of sale that retailers really covet.”

He declined to comment on his company’s relationship with Google.

Mr. Bergeron added that he also expects Apple to embed NFC technology in future iPhones. BlackBerry maker Research in Motion Ltd. has said its future phones would support NFC.

A spokeswoman for Apple declined to comment.

The market for mobile payments is expected to grow significantly in the next several years, reaching $618 billion by 2016, according to a report by consulting firm Edgar, Dunn & Co. and sponsored by MasterCard.

A report issued this month by the Federal Reserve cited industry estimates that there were 70 million contact-less devices, including credit and debit cards, and 150,000 contact-less readers installed by merchants in the U.S.

While most of the financial activity that now takes place on smartphones involves people engaging in transactions with their bank, the credit-card industry has spent millions of dollars to issue new plastic with the contact-less chip that speeds the check-out process.

The technology has been slow to catch on, however, partly because many consumers remain unaware of it, and they still need to pull out their card to use it.

MasterCard and rival Visa Inc. have been courting customers with contact-less programs and mobile-payment pilot tests. Visa and several large banks are testing mobile-payment programs that allow consumers to make contact-less payments with an existing smartphone equipped with a special chip card and antenna.

If Google’s program with MasterCard and Citigroup is successful, it could potentially expand to other card issuers and networks. In addition to attracting new consumers through ads or offers and seeing instant results, the program would offer retailers access to data about customers so they would be able to market future offers to their devices, said people familiar with the matter.

That potential, however, could raise privacy concerns.

Unlike some other forms of local advertising, the system would allow Google to prove whether ads targeted at certain groups of people led directly to in-store sales, these people said.

Google, by helping to facilitate transactions and redemptions of coupons and discounts, may also be able to gain insight into consumer-spending behavior, said a person familiar with the matter.

A representative of Wal-Mart Stores Inc. confirmed the company had a briefing with Google about the technology, but characterized it as very preliminary discussions and said it hasn’t been asked to adopt it.

The local business ad market is a massive opportunity that has begun to be exploited by Internet companies such as Groupon Inc., social network Facebook Inc., and business-reviews site Yelp Inc.

Separate from ad spending by large retailers, small and medium-sized businesses with 100 or fewer employees collectively spent $35 billion to $40 billion in local advertising in the U.S. in 2009, estimates BIA/Kelsey, a local-media advisory firm.

Bloomberg , Tuesday, March 15, 2011, 12:06 PM

Breaking into the business of real-world commerce, Google reportedly plans to start testing a mobile-payment service at stores in New York and San Francisco. Within four months, Android users will be able to use their smart phones to buy products and services from select merchants, sources tell Bloomberg. “The project would put Google in a growing field of companies experimenting with [near-field-communication technology], which lets consumers pay for products and services by tapping a device against a register at checkout, giving them an alternative to cash or physical credit cards.”

Regarding New York and San Fran, Engadget writes: “Those two technophile cities represent the most receptive audience NFC is likely to get in the U.S.” Strengthening Google’s already deep consumer ties, the service may combine a user’s financial account information, gift-card balances, store loyalty cards and coupon subscriptions on a single NFC chip on their Android phone. “This is good news for Google, considering the iPhone 5 reportedly won’t have near field communications technology,” notes Business Insider.

“Google, however, doesn’t have many NFC devices out in the world,” according to Fortune. Yet, “If Apple does skip NFC hardware for another year, it will likely give Google a solid window with which to build infrastructure … Apple may in fact choose to skip NFC, instead relying on third parties.” To facilitate the system, Google is reportedly paying for the installation of thousands of special cash-register systems from VeriFone Systems. The registers would accept payments from NFC-equipped phones.

A new report from research and advisory firm Forrester Research Inc. says mobile marketing investments will surpass $1 billion this year as marketers begin to see returns on their investments from consumers buying more via mobile.

The report, “Mobile Trends 2011,” also predicts mobile will combine with social and local services through programs like Facebook Places to gain significant traction over standalone location-based services. However, it says that ad revenue from such services will be cut short because of privacy concerns.

The report, written by Forrester analysts Thomas Husson and Julie Ask, also predicts companies planning to reach large audiences via mobile apps will continue to face a fragmented market with a wide variety of mobile devices, operating systems and screen sizes.

The report also forecasts:

• The term mobile will mean a lot more than mobile phones. Tablets such as Apple Inc.’s iPad will emerge as a category of their own in the years to come. However, the report says only mobile phones will sell in the hundreds of millions and are truly “pocketable,” providing anywhere/anytime connectivity.
• 2011 will be the year of “the dumb smartphone user.” Because of deep discounts, smartphones will be available to the masses. That, Forrester says, means new smartphone owners will be less engaged and active than earlier Android and iPhone owners. However, thanks to customer education and the convenience that such sophisticated devices offer, even so-called “dumb smartphone users” will consume massive amounts of mobile media and data.
• NFC, augmented reality and Quick Response, or QR, two-dimensional bar codes will finally reach their tipping points. Technologies such as QR codes and mobile augmented reality, which uses the capabilities of a mobile phone to enhance a presentation, such as using the smartphone’s GPS to identify a consumer’s location and then displaying through the device’s camera view a coupon to a nearby store, are already helping bridge the real and digital worlds via mobile devices, Forrester says. And the report predicts 2011 will finally be the year that Near Field Communication (NFC) begins to matter for mobile. The market will start to move away from the pilot stage in regions where NFC infrastructure is in place, Forrester says. “There is already quite a bit of this happening in Japan,” says Ask. “More of it will occur with education with consumers in the U.S. and Europe. We’re at the very, very beginning of consumers beginning to understand these use cases with their customers.” NFC is a technology that enables phones (or other items, such as credit cards) to interact with objects—such as posters and payment terminals—over a distance of a few inches.

Several media outlets last week reported that Apple is working on adding NFC mobile payment capabilities to the forthcoming iPhone 5. Companies such as Isis have launched over the past year aiming to enable shoppers to use NFC technology to pay with their phones in stores. Isis is backed by AT&T Mobility, T-Mobile USA and Verizon Wireless, which together provide wireless services to more than 200 million U.S. consumers.

NEW YORK (CNNMoney) — Credit cards may soon be as outdated as vinyl records. (Remember those?) And this is the year that the slow, steady march to oblivion begins.

You can already use your iPhone, Droid or BlackBerry to buy a hotdog at the ballgame, buy your Starbucks latté, or give a friend a few bucks by Bumping phones. But by the end of the year you may not even think twice about reaching for your phone to pay at the register instead of fumbling for your credit card.

“Your plastic card hasn’t changed since the age of the vinyl records,” said Michael Abbott, CEO of Isis, a new mobile payment network. “This is the chance to bring payments forward from the plastic age and the vinyl records age to the digital age.”

While companies have been experimenting with contactless mobile payments for years, 2011 is expected to be the year the technology really takes off. That’s because millions of phones capable of making contactless payments are expected to be shipped out in 2011.

As a result, this pay-by-phone market is forecast to make up $22 billion in transactions by 2015, up from “practically none” last year, according to research firm Aite Group.

“Mobile payment is going to get really interesting and is going to see a lot of activity in 2011,” said George Peabody, director of emerging technologies at Mercator Advisory Group. “We’re going to start seeing more and more people leaving their homes without their wallets.”

But that doesn’t mean it’s going to happen overnight, said Jane Cloninger, director at Edgar Dunn & Co., a consulting firm specializing in financial services and payments.

“I definitely believe that the mobile wallet will eventually replace the plastic card — but it’s going to take some time because consumer habits take a long time to change,” she said. “But where before it’s been a lot of discussion, we’re at the point now where you’re going to start seeing momentum toward it and going to see it move beyond the trials and into reality.”

Companies including Visa, MasterCard, Google, Bank of America, Citi and U.S. Bank are all testing contactless mobile payments, and many expect to roll out mobile wallets this year.

“2011 is going to be a very exciting, very dynamic year when it comes to mobile payments because it’s the Wild West again, with all these players positioning in various different ways to redefine the digital payments landscape,” said Michael Upton, senior vice president of online and mobile banking at Bank of America, which expects to launch it own mobile wallet later this year.

Meanwhile, AT&T, T-Mobile and Verizon joined forces with Discover and Barclays in November to form Isis and provide a rival to Visa and MasterCard.

“It’s a glorious competitive battle amongst some of the largest entities in the country,” said Peabody.

The Isis mobile wallet will let consumers store multiple cards, make payments with the wave of their phone, check balances, receive coupons and use rewards points at the point of sale. But it may stretch beyond just the money in your wallet. Abbott sees the potential to include your insurance cards, driver’s licenses, and other information typically found in a wallet.

“[Payment] is where we’re going to start, but where it goes is wide open to the innovation of other players who want to be involved,” he said.

Beth Robertson, a payments analyst at Javelin Research and Strategy, said that could mean developing ways for consumers to make contactless ATM withdrawals by simply waving a phone in front of an ATM as you would at the point of sale.

But because of just how much your smartphone now holds, it’s quickly becoming your most dangerous device.

“We’re increasingly living our lives on our cell phones…The problem is that we’re not yet used to thinking about our wallet in terms of our phone,” said Ed Goodman of Identity Theft 911. “No matter how good security on any type of mobile banking or payments, there are going to be people who are able to find a way around it — it’s really all about making sure everyone ramps up their awareness.”

Google showed Near Field Communication capabilities in Android version 2.3, Gingerbread, will do in the near future with a new marketing campaign in Portland for Google Places. Gingerbread phones with NFC, the Nexus S, can touch their phones to the sticker to find out more information about the business. Hotpot is a local recommendation engine powered by users and friends.  To encourage more reviews in Hotpot, Google is offering a poster contest with dinner prizes at local restaurants. Google chose Portland as its first city to promote Google Places and Hotpot because of its thriving local business community. Reports suggest that there will be other NFC uses, such as mobile secure payments and keys to open doors.