As Google’s outgoing CEO Eric Schmidt put it at last month’s Mobile World Congress, NFC combined with smartphones represents a "mega-scale opportunity" and promises to "revolutionize" electronic commerce and payments.

Google has been gearing up to take advantage of that opportunity. I’m told it has been contacting a number of large U.S. merchants, including Wal-Mart, to get buy-in for its plan to push location-based mobile marketing and advertising to consumers, who could then tap their Android NFC phones using a Google-developed mobile wallet.

Google also has been putting together a team of payment and other mobile-commerce professionals, as it continues to build the wallet and the foundation for the cloud-based apps that would pinpoint a consumer’s location, know his interests and tap to collect and redeem offers and pay with NFC–with the consumer’s opt-in, of course.

And the Web giant has been working with big U.S. acquirer and processor First Data, which could provide connections with potentially millions of merchants, including small and medium size retailers throughout the United States. First Data also has introduced a trusted service management offer, and Google, I’m told, is interested in using it for applications downloaded to the wallet, perhaps for its own services or those of its partners.

Google also has been rumored to be in discussions with contactless reader maker Vivotech and point-of-sale terminal vendors, such as VeriFone. Along with First Data, these hardware vendors would provide the vital links between merchants and Google’s mobile-commerce platform when Android-users tap at the point of sale.

But everything I’ve heard from people who do more than just guess about Google’s–or for that matter, Apple’s–plans for NFC says neither wants to face the uphill battle of launching its own payment scheme at the physical point of sale.

Instead, they would build NFC-enabled digital wallets for their smartphone operating platforms, in which payment service providers, including banks, could store their applications. Apple’s wallet plans are less certain, despite a recent patent application with an e-wallet icon on the home screen.

But Google is definitely working on the phone software, code named "Cream," which was due out by April but might be delayed until early summer.

NFC Payment is a critical component in Google’s grand m-commerce plans because it consummates the consumer’s relationship with merchants that Google hopes to broker through its targeted mobile promotions and access to consumers when they are in or near the retail outlet. This targeted access is what Google would be selling to merchants. Besides that, the payment transactions would gather data on consumers’ buying habits for the next round of promotions, again, with the consumer’s permission.

"For Google, the opportunity is not the 1.5% they would receive for payment. The opportunity is the 10%-plus they get for referring the sale to the merchant. That’s why the payment business isn’t interesting (for Google)," said one observer of the Web giant’s moves in NFC.

The company made more than 95% of its $29.3 billion in sales last year from Web advertising. It wants that revenue flow to continue unabated as consumers do more and more browsing and search queries on their smartphones.

And smartphones combined with NFC could give Google something it lacks on the fixed Internet–access to physical merchants–where the vast majority of commerce is done. This is probably the crux of the mega-scale opportunity Schmidt was talking about.

Potential access to millions of physical merchants and targeted offers were likely the main things Google was after when it made its mega-bid for deal-of-the-day e-commerce site Groupon. Groupon, however, rejected the $6 billion offer late last year.

"Wouldn’t Google love to find a Groupon killer with something you could redeem at point of sale?" Todd Ablowitz, president of the U.S.-based Double Diamond consulting firm, told me.

He could not say whom he thinks Google might work with for the payment or other pieces of its m-commerce platform anchored by NFC phones.

Are Citi and MasterCard Onboard?
But I’m getting strong signals that a Citigroup-issued MasterCard PayPass application would be among the first payment card accounts in a Google wallet.

Citi is the only one of the top five U.S. banks not working on contactless microSD cards—at least not that we know of. Of course, Citi mostly works with MasterCard, which only recently gained access to the products of the main vendor supplying contactless microSDs for payment at present, DeviceFidelity. The vendor had had an exclusive deal with Visa Inc.

But unlike such Citi rivals as Bank of America, which appears to favor microSDs or other NFC alternatives, Citi has been among the strongest backers among U.S. banks of full NFC.

Yet, up until now, besides a rather anemic launch of a passive contactless sticker carrying a PayPass application last spring, Citi has done nothing in contactless-mobile payment stateside since an NFC trial it launched with MasterCard in New York City in 2007.

That absence is despite bubbly statements by a Citi executive about how much customers love NFC. Some execs made the same noise after a large NFC trial in Bangalore, India, in 2009.

Of course, compelling NFC phones will only become available this year. And Google is not the only platform or device supplier that is working on a mobile wallet.

If Citi, in fact, is going to be part of the Google wallet, it would bring MasterCard along. If nothing else, MasterCard would help to fund Citi’s implementation.

MasterCard also would be more flexible than Visa Inc. in working with new players in the payment industry. And the card network has been preparing for the coming of full NFC.

In January, it hired Mung-Ki Woo, in part for his direct experience in handling NFC projects with mobile operator France Telecom-Orange Group.

Referring to plans by some mobile operators to introduce their own payment brands using NFC phones, Woo told me earlier this month that MasterCard is "prepared to enter a dialogue" with the telcos.

"They will yield more business benefits by working with MasterCard than trying to sort of reinvent the wheel," he said. "Proximity payment is a complex domain."

MasterCard, like Citi, First Data and the POS terminal and reader vendors are not confirming plans that they are working directly with Google.

Wallet War Ahead?
Google seems to agree that it doesn’t pay to launch its own payment scheme. But it will be interesting to see how Google’s wallet stacks up against the wallets planned by three of the four major U.S. mobile carriers, AT&T, Verizon and T-Mobile USA.

The U.S. telcos plan their own payment brand, Isis, which will anchor the wallets. So a Google wallet, at least in theory, could reside on the same Android phone as an Isis wallet.

But which secure element would any Citi-MasterCard PayPass payment applet be loaded on as part of a Google wallet? Would it go onto an embedded chip or possibly the SIM card, the latter directly controlled by mobile operators? Who will control the embedded secure chip in these Android and other NFC phones?

Schmidt, who will step aside next month as Google CEO and become executive chairman, did not discuss this issue in his relatively brief comments about NFC during his keynote at the Mobile World Congress last month in Barcelona. But he did seem to lump the contactless NFC chip in with the secure chip, speaking of it as one unit. Was he talking about an embedded chip?

The first Android NFC phone on the market, Google’s Nexus S, made by Samsung and released in December, has an embedded chip but also supports NFC applications on SIM cards–though the application-programming interface for payment using NFC’s card-emulation mode is not yet part of Android. The same architecture is expected for the forthcoming Samsung flagship Android phone, the Galaxy S II.

Some observers believe the U.S. carriers would want to hold the keys to all secure elements in the NFC phones they sell, including those for embedded chips. But these keys would be in the control of the handset makers, unless telcos are able to insist the phone makers hand over the master keys after the phones leave the factory.

"The fundamental question is, can smartphone vendors embed NFC in the phone and launch NFC services and still have the carrier sell phones to customers?" one observer remarked to me.

The battle over the secure element in NFC phones that has simmered for years between mobile operators and banks now seems to have some new contenders–Google and the Android handset makers, as well as Nokia-Microsoft, Research in Motion with its planned BlackBerry NFC phones and, of course, Apple, though it's not clear whether the latter will adopt NFC for the next iPhone. The secure chip in NFC phones will become an important piece of real estate, supporting potentially lucrative applications, such as payment, and the corresponding apps in the platform providers' app stores.

But with Google planning to launch its NFC wallet as early as this spring–one of the first real shots in that battle could be fired soon.