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Google is building a mobile wallet nicknamed "Cream," which it plans to integrate with Android NFC phones that consumers could tap to pay in stores, sources told NFC Times. Among banks showing strong interest is U.S.-based Citigroup.

At least one other major U.S. bank has expressed interest in Google’s NFC mobile-payment initiative, JPMorgan Chase, said a source, who added that MasterCard Worldwide and Visa Inc. have also been in talks with Google about possible participation in the Web giant’s plans to launch the wallet and enable a mobile-payment and advertising service on NFC smartphones. Among those phones is expected to be Google’s own Nexus S, said sources.

If the parties go ahead with the plans, an announcement of a launch could come early this year, with some sources predicting it could happen in a matter of weeks. Several Android-based NFC handsets are expected on the market this year, but at present there is only one, the Nexus S, launched last month, which still doesn’t support payment.

'Cream' of the NFC Phone Crop?
But contrary to reports Tuesday, most sources agree that Google is not planning its own mobile-payment service. Instead, it would likely act as an enabler for mobile payment by banks and other payment service providers as part of a strategy to capture mobile advertising revenue for itself. In particular, Google would target consumers when they are in the store or right at the point of sale terminal.

Google makes the vast majority of its revenue now from advertising on the fixed Internet, but as more and more Web browsing and searches move from desktops and laptops to smartphones, Google needs to adapt its business model. With mobile phones, the company could locate consumers using global positioning or NFC’s tag-reading capability and charge advertisers, such as merchants and consumer products companies, for access to shoppers.

"Google is not interested in becoming the next MasterCard; they’re interested in enhancing the payment device with pinpoint accuracy for advertising and marketing," said a source with knowledge of the initiative. "It’s the holy grail of every marketing company–to impact the consumer in the place where they can buy."

The Cream wallet would be a default feature on Android phones, just like Google Maps. And just as Maps uses GPS to help render its services, Cream, or whatever the wallet app would be called, would have NFC technology as an enabler, said a source.

At present, the Nexus S and the latest version of the Android operating system running on it, called Gingerbread, only supports tag reading. As part of its Hotpot service, Google has launched a pilot enabling consumers with the Nexus S to tap NFC-tags displayed by merchants in their store windows in Portland, Oregon. With the service, users could pull down information about the merchants, including reviews and recommendations, and Google could gain information about the users, said Nick Holland, senior analyst with U.S.-based technology research and consulting firm Yankee Group.

"While the mass media is lit up about Google becoming the next Visa or MasterCard, they are totally missing the point," Holland told NFC Times. "Google makes 97% of its revenues from advertising and will continue to look for ways to do this. There is a huge dormant opportunity for them with physical world merchants. Tapping an NFC-enabled phone at a physical merchant location is equivalent to clicking an advertising link to get to a Web page–it is evidence that a potential consumer has been there and, for Google, monetizeable. Why would Google want to squabble over interchange fees and transaction share when they can own location-based advertising instead?"

Citi and MasterCard perhaps see the Google m-wallet initiative as a way to gird for expected competition next year with the Isis joint venture made up of three of the top four mobile carriers in the United States, Verizon, AT&T and T-Mobile USA. The telcos plan to introduce their own payment brand at the point of sale, using the Discover Financial Services retail network. They also are keen to use NFC phones sporting the popular Android platform–in this case, to load with their Isis application.

This might create a battle for control of the primary secure element in the phones, where the payment applications would be stored. Many of these secure elements are expected to be embedded chips, as in the Nexus S, not on SIM cards, which are strictly under the control of cellular operators that issue them. But since mobile operators in the U.S. exercise much control over distribution of phones to subscribers, they might also demand control of the master keys from handset makers to any embedded secure chip in the phones.

One source also said Chase and Visa have expressed interest in working together on a prepaid payment application for the Google wallet. Google had also tried to recruit Bank of America, which was initially receptive, but then dropped out, said the source.

Citi and MasterCard could not be reached for comment. A spokeswoman at Chase said the bank would not comment "on this speculation." Visa declined all comment when reached.

"If this is true, it will make an enormous splash in the market," said Todd Ablowitz, president of the U.S.-based payments consulting company Double Diamond Group, speaking of a possible launch of mobile payment by Citi and MasterCard involving Google, given the Web giant's powerful consumer relationship.

Going Beyond Stickers and microSDs
Citi and MasterCard are working together on a passive-sticker program, launched last spring, which to date is Citi’s only actual mobile-payment offer at the point of sale. But the bank has indicated that much more is to come with NFC and contactless-mobile payment. Chase and Bank of America have been testing contactless microSD cards with Visa. All three banks have participated in NFC phone trials.

Visa may not be so keen to be part of the Google wallet, said a source, but its banking customers are clamoring for products they can use to enter the mobile-payment market and ward off feared competition at the physical point of sale from such payment services providers as PayPal and the Isis joint venture. Visa’s only answer so far to these threats have been some shopping apps and its contactless microSD card program, which some say is not yet ready for the market.

"Visa is trying hard to remain in the race," said a source.

Even with the banks and card networks involved, launching NFC payment will still be a challenge. At present, fewer than 2% of merchant point-of-sale terminals in the United States support payment from contactless cards or NFC phones.

Some observers believe Google might want to introduce payment, but mobile advertising still would be at the core of the company's strategy for making money with NFC phones. One option would be for Google to bypass the problem of the scarcity of readers at the point of sale by using low-cost tags. Consumers could tap their NFC phones on the tags at the point of sale and conduct cloud-based payment transactions. Instead of an actual payment application stored on a secure element in the phone, perhaps a credential of some type would be secured there, authenticating the user to the network.

"The next wave of eyeballs at devices will be with mobile smartphones," said Charles Walton, chief operating officer for NFC chip supplier Inside Secure, who sees the cloud-based payment option as viable. "Based upon their current business model, I might theorize that their (Google's) next step could be mobile NFC commerce services that are a giveaway to gain continued and growing dominance in their core-revenue segment of advertising. This would turn the industry upside down."