What Google and Mastercard's new mobile payment system could mean for iOS users

Last week saw a major new product announcement from Google: the new "Google Wallet" will allow people with compatible mobile phones to use them to pay for goods and services in shops with a simple wave of their hand. This follows a number of in/out/in/out/shake it all about rumors that this "NFC" stuff might be included in the next iPhone. So what is NFC and why should you care? Sit back, grab a cup of coffee, and I'll explain.

A brief history of Near Field Communications

First thing to understand: near field communication isn't a technology standard but rather a wide family of incompatible devices. They all offer wireless communication between two devices across short ranges (typically just a few inches) and at very low bitrates (just a few hundred kilobit/sec). The usage you're probably most familiar with is radio frequency identification (RFID) devices like this electronic key fob:

These take advantage of one quite magical aspect of NFC: active/passive mode. The receiver fob has a tiny chip on it, and an antenna, as you might expect; when you wave it near the receiver pad on the door, the chip broadcasts its ID code, and the receiver pad unlocks the door. What's clever is that the fob has no power source; there's no battery in there to run out and need replacing. Instead, it gets all its power from the receiver pad itself via an inductive loop, which can wirelessly send small amounts of power over short distances. You might have seen these in electric toothbrush chargers, or those wireless charging mats you sometimes see sold as cell phone accessories.

As RFID devices could be made much more rugged than traditional magnetic strip cards, and used more quickly than a dip-into-reader microchip smartcard, they quickly found favor with public transport companies trying to move passengers away from using cash. Hong Kong's Octopus card was the first in 1997; London's Oyster card launched in 2003 and is now used city-wide across buses, trains and the Underground. Passengers pass through turnstiles whilst waving their card near a flat reader plate; billing is handled automatically, and the passenger can just keep walking through. You barely have to break your stride.

NFC payments

Now, what if we could bring some of this convenience to shopping with plastic? Unsurprisingly, I'm not the first person to have this thought. Mastercard and Visa are pushing the idea quite hard. Mastercard's PayPass system and Visa's payWave are compatible systems that both integrate an RFID chip into a traditional credit card, integrated to the same billing account as the card itself. Rather than have to sign a credit card slip or enter a PIN code, you just wave your card over a receiver and saunter on out of the store. In the UK, we're starting to see some major nationwide chains rolling out compatible readers now in all their shops -- I saw my first one in the wild in the small Welsh town I live in a few weeks ago. In the US, more than 120,000 locations now have readers, including Subway, Macy's, Walgreen's, Toys R Us and American Eagle.

You may be wondering about security; what happens if someone steals or clones your contactless card? The short answer is that, necessarily, there is less physical protection against fraud with no signature or PIN entry. Consequently, there is a greater emphasis on curbing fraud through tight credit limits -- contactless transactions are typically limited to $25 or so -- and electronic systems that watch accounts for signs of trouble and can remotely override the contactless reader to prompt for a PIN or ask the retailer to obtain a signature. Also, as usual, if you do lose your card or your card is cloned, as long as you comply with your bank's terms and conditions and tell them, fraudulent transactions are covered by it.

Enter the smartphone

So, that's where we are now; what about tomorrow? How does Google's announcement change the picture?

In essence, Google is proposing to move the NFC interface from your dumb, powerless credit card and into your smartphone instead, whilst still working with the existing PayPass/payWave NFC readers that retailers are starting to install. This has several immediate benefits.

Firstly, and probably most obviously, it's less stuff to carry in your wallet -- particularly if retailers can be persuaded to use NFC loyalty cards, NFC-based coupons and so forth. Google is chasing this market with GroupOn-me-do Google Offers, which is integrated into Google Wallet. So, if that day's deal is two-for-one at a restaurant, then the single act of touching your phone to pay the check will also apply the voucher.

Secondly, the object with your NFC details on it is no longer a dumb chunk of plastic; it's a smartphone with an interface and a battery. Google is using the smartphone interface to implement some basic security in the form of a PIN entry before money is spent. This gives up a small amount of convenience of pure touch-your-credit-card systems, which means the per-transaction credit limit on a Google Wallet payment is $100, higher than the $25 or so caps that are usually applied to card-based NFC purchases. As noted by CNET, Google Wallet also has protection against the worrying threat of wireless card skimmers by disabling the NFC broadcast hardware whenever the phone's screen is off.

Thirdly, now that the phone is the active device in the active/passive pair, all sorts of other devices can be interacted with through NFC. Google has mentioned the idea of "smart posters," which would build an NFC chip into the poster frame. When touched with a compatible smartphone, the chip sends some data to the device -- perhaps a website for more information, or access to special offers for whatever service the poster is selling. At the very least, this could lead to less goofy-looking QR codes in our lives, which can't be a bad thing.

Sounds great, but there's a couple of flies in the ointment. Jilted bride PayPal, who "spent three years trying to work out a deal in which it would handle payments for Android smartphones" according to the AFP, is trying to sue Google Wallet out of existence in what is likely to become a bitter fight. PayPal is alleging that Google poached senior members of its staff in order to procure trade secrets. Florian Mueller of renowned patent litigation blog FOSSPatents wrote on Twitter, "Reviewing eBay/PayPal complaint against Google. First impression: very high probability of a patent clash following within a year's time."

Finally, pay attention to what Google Wallet isn't yet: a viable service. What Google announced was a trial limited to two cities (New York and San Francisco), one handset (the Nexus S 4G), one operator (Sprint) and one card provider (Citi, although Google also offers its own pre-paid credit card). It's not saying when the scheme will expand beyond this limited experiment. Meanwhile, here in the UK, Orange is being quite aggressive with its new "Quick Tap" payments scheme; only one handset and one bank (so far), but the readers are at least supported nationwide.

Whither Apple?

It's arguable that Google's big, splashy announcement wasn't really warranted for a project that is, at least for the time being, quite limited in scope; it's possible Google was attempting to steal thunder from any announcement by Apple about NFC payments for the iPhone at WWDC next week. So, on that note, where do we think Apple is at in all of this?

Typically, of course, it's being utterly close-mouthed about future plans. It seems safe to assume, though, that because Apple is a fan of money it would quite like to become the gateway through which all of your personal spending flows. It's also logical that the very nature of adding NFC to a smartphone involves lots and lots of negotiations with a whole heap of financial services companies, not all of whom are going to be able to shut up about it. Hence the constant tirade of "the next iPhone will/won't have NFC" rumors. There's too much smoke here for there to be no fire, though, and I'm confident that we'll be getting iPhones with NFC chips sooner or later.

In fact, you can actually have the ability to make NFC payments on your iPhone right now, if you so desire. Visa has even experimented with contactless payments for iPhones through a rather clumsy add-on dongle and a corresponding iOS app; it's not exactly fantastic, but apparently it does work. I'd have preferred to see a case rather than a dongle, though.

On the face of it, then, it'd be pretty easy for Apple to reach parity with Google Wallet's current features. Put the necessary NFC hardware into a future iPhone, do some deals with a couple of banks to partner with at launch, and boom. What I'm more excited about is what happens next. See, Apple already has my credit card details on file via my iTunes account -- so why, necessarily, am I messing around signing my card details separately into some sort of Google Wallet app? Why not just bill directly to my card via the same mechanism as when I buy apps or music? It's the next logical step.

It's interesting that Google didn't take this approach, and that Google Wallet doesn't integrate with its Checkout service. This might perhaps be a sign that Checkout isn't that popular, so there wasn't much to be gained from making the services co-dependent. It might also be because Google thinks consumers would worry more about security, or because they like to have the flexibility to have several cards for different types of purchases, and collapsing everything to one single account means they can't do that any more.

And there's even another step beyond that. If some large proportion of all the iPhone owners in the world start routing most of their shop purchases through their iTunes accounts, the amount of money flowing through it will be staggering -- and logically, Apple would want to keep as much of those transactions fees for itself as possible. I wouldn't be astonished if we eventually saw an Apple-branded credit card service (probably run by a rebranded partner bank as consumer finance is a long way from Apple's core business). It could also provide an enormous boost to the currently floundering iAd, because Apple would have an incredible amount of demographic information at its fingertips about each iTunes user who also used NFC payments.

I'd also like to see some support for device-to-device transactions carried out between two smartphones, similar to the current "bump to transfer" functionality in the PayPal iPhone app. Nothing like this has been announced for Google Wallet, but it's a logical feature to add in the future. This would be a major blow against PayPal, though, who was presumably hoping for this sort of thing to be a growth area for its business -- presumably its nervousness about this is why it's suing Google.

It'd also be quite bad news, on the face of it, for indie darling Square and its take-credit-cards-with-an-iPhone dongle and application, but really, the core of Square's business is in being a payment house offering ultra-simple payment terms and conditions to small merchants who otherwise could only take cash from their customers. None of that goes away in a Brave New NFC World; we just lose the need for the (let's be honest: rather clumsy) payment dongle. We also know that Square and Apple are quite close, though; I do wonder if this road ends with Apple acquiring Square and integrating the latter's staff and know-how into whatever NFC plans they have internally.

Wrapping up

Google's new Wallet service offers iOS users an interesting glimpse of the possibilities of a world where a) our preferred smartphone has NFC payments support and b) so do our favourite retailers. We know that b) is in progress (and that Google's announcement will help speed that process along); it's pretty safe to assume that a) is also coming in the not too distant future. Waving your phone around instead of signing a credit slip or entering a PIN is unlikely to change anyone's life, but the bigger picture of how our payments flow between companies -- and which of those companies end up keeping the transaction fees -- will have far-reaching consequences.