Google's Search for a Digital Wallet

Since mid-December, Google (GOOG) has been handing out hundreds of kits to local businesses in Portland, Ore., as part of a trial called Hotpot. The kits include window decals that use near-field communication, a low-power technology that beams and receives wireless information from up to four inches away. When customers with NFC-equipped phones—including the latest models running Google's Android software—scan one of the window decals, they'll see the business's operating hours, reviews, and other relevant information. "It's something that helps local businesses," says Sara Heise of Voodoo Doughnut, one of the merchants taking part in Hotpot. "It'll allow us to interact with our customers more, especially the younger, texting generation."

It's also the latest sign that 2011 will be the year of NFC. Google is considering building an NFC-based wireless payment service in the U.S. that could make its debut this year, say two people familiar with the plans. The technology would let customers pay for items by passing a smartphone over a small reader. A single NFC chip would be able to hold a consumer's bank account information, gift cards, loyalty cards, and coupons, say the two people, who requested anonymity because the plans aren't public. Google's NFC scheme includes an advertising component that would allow merchants to beam a coupon or other reward to customers while they are shopping.

Smartphone owners can already complete transactions on the go by downloading applications. PayPal's iPhone app, for instance, lets users send money to other accounts. NFC technology can streamline such transactions. Phones with NFC don't require users to launch an application; they simply wave or tap their phone against a reader and enter a PIN number on it to authenticate the purchase.

Any NFC offering from Google will face tough competition from the start. In November, Verizon (VZ), AT&T (T), and T-Mobile formed a venture called ISIS that plans to launch an NFC-based payments service by 2012. Visa (V) is testing several mobile payment technologies, including NFC, and plans a commercial roll-out late this year, according to Bill Gajda, Visa's head of mobile innovation. PayPal, a division of eBay (EBAY), may test an NFC service in the second half of 2011.

Other Silicon Valley companies may be working on the technology, too. Apple (AAPL) has filed a patent for a process to transmit money between cell phones using NFC. The iPhone maker also recently lured NFC expert Benjamin Vigier away from mFoundry, a startup that helps banks build mobile payments applications. "It's a land grab," says Jaymee Johnson, a spokesman for ISIS. "Folks are sort of jockeying for position." The prize for whoever wins the race is a dominant position in a small but fast-growing market that "could displace the cash register," says Charles Walton, chief operating officer for NFC chipmaker Inside Secure. IE Market Research estimates that, by 2014, NFC-based payment systems will account for a third of the $1.13 trillion in worldwide mobile transactions.

Google wouldn't comment on its plans for an NFC payments service. At a conference in November, Google Chief Executive Officer Eric Schmidt enthused about NFC, saying it will "eventually replace credit cards." In mid-December, Google bought Zetawire, a Canadian startup with several NFC patents, including a method for diners to split and pay a restaurant bill using their mobile devices.

In launching a payments service, Google would have the advantage of its swiftly growing base of Android mobile phone users. Every day, some 300,000 people activate Android phones, and they accounted for more than 25 percent of the new smartphones shipped in the third quarter of 2010, according to researcher Gartner. The latest version of the company's Android mobile operating system, dubbed Gingerbread, is the first one capable of reading NFC tags. Updates to the software later this year will let Android phones transmit information using NFC as well, says Andy Rubin, Google's vice-president of engineering.

For an NFC payments service to work, Google needs to convince not just smartphone users but also merchants, who have to install NFC readers to process mobile payments. Hotpot, which Google has been promoting at Portland Trail Blazers basketball games and around the city, introduces them to the technology. "We are going to start expanding into more and more cities in the near future," says Lior Ron, group product manager for Hotpot. "We want to make it national."

The bottom line: Google is considering joining the crowded mobile payments field. NFC technology could turn its Android phones into checkbooks.

Before it's here, it's on the Bloomberg Terminal.