Apple On Mobile Payments: "Hey Google, You Go First"

Apple is discovering how hard it is for a smartphone to mimic an ordinary contactless payment card—and Google is about to learn the same lesson. On Monday (March 14), word leaked out that Apple won't be including contactless payment support in the next iPhone, stunning analysts who were sure it would be there. The very next day, word leaked out that Google will launch an Android contactless-payment trial this summer—and that, ironically, will make it easier for Apple to make the jump into contactless payment next year.

The problem isn't near field communications (NFC) itself. Apple could easily stick the hardware into the next iPhone, just as Samsung put an NFC controller and security hardware in its Nexus S Android-based phone. But Apple is worried that there's no industry-standard way for apps to communicate with that hardware, which is also why the Nexus S can't currently behave like a Visa PayWave or MasterCard PayPass card, either. Once Google updates Android to add a software stack that can do payments, the process of hashing out that standard can begin in earnest.

Neither Apple nor Google will confirm the leaks. But published reports said Apple told mobile carriers in the U.K. that it's concerned about the lack of an industry standard for NFC payment support. That means Google, which reportedly is paying for thousands of NFC-equipped POS terminals for the retailers in New York and San Francisco participating in its trial, will get to see if the NFC support it chooses will work well. If it does, that could be the basis of the standard NFC protocol stack that Apple is waiting for.

At that point, "mobile payments" will still have only reached the point where smartphones can substitute for credit and debit cards in the checkout lane, and Visa and MasterCard will still own the process. But it's the first step to enabling all the much more interesting forms of mobile payment that Apple, Google and other payment wannabes would love to get a piece of.

If it seems baffling that the long-available NFC hardware is waiting on the software, keep in mind that neither Apple nor Google can simply write an app that pretends to be a contactless credit card. Well, OK, they could. But that would be a spectacularly obvious invitation to payment-card fraud.Instead, smartphone vendors have to include both an NFC chip and an embedded secure element—hardware that controls encryption and storage of card information. Both of those chips are in the Nexus S. But, like Apple, Google has been skittish about implementing the software that talks to the secure element. And no wonder: Get that software wrong, and you'll have far more than a minor annoyance. Head down a path that the rest of the industry decides not to take, and you'll have to backtrack and then catch up with your competitors.

This summer, Google makes that jump first. Google has a little easier time than Apple in choosing an NFC protocol stack. Last month, a French company announced an open-source stack called OpenNFC, and Google has been working on its own open-source NFC stack project called SEEK (secure element evaluation kit). Whether Google picks one or stitches together pieces of several projects, at least Apple will be able to see what its competitor is doing.

That's the hard part. Once Google has proven it can make an expensive smartphone act like a cheap contactless card, and Apple signs off on some compatible version of the NFC protocol stack for the iPhone, that's when the fun begins. Apple is widely expected to use iTunes to create its own payment system for brick-and-mortar retail. (Of course, Apple was also widely expected to include NFC in the next iPhone.)

Google's own payment system, Google Checkout, hasn't exactly been a winner online, but it might form the basis of an in-store payment system. Or Google could focus on building an infrastructure for authenticating a customer's identity on the fly—say, by having the smartphone communicate with the carrier to match the payment card number with the mobile account. Or it could even use something as exotic as a voiceprint—these devices are designed to talk into, after all.

Meanwhile, PayPal has announced that it, too, wants to move into in-store payments. For that, it needs smartphones that can do contactless—let's face it, nobody really wants yet another plastic card. And social media players like Foursquare are beginning to experiment with NFC to make check-ins a lot more accurate than the current geolocation approach that uses GPS.

Once that starts happening, it will be time for retailers to let customers put their loyalty-card points on their phones, too. But not until Apple and Google get their (protocol) stacks together.