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As reported in the previous post (and everywhere else in the universe), Google just announced its mobile payment system, Google Wallet.

The long expected product will bring together NFC and payment processing to let mobile users transact by swiping their phone at physical stores. Launch partners include Master Card, but it’s advertised as “open” so other payment networks, carriers and banks will join.

As for hardware compatibility, Google claims 50 percent of smartphones will have NFC built in by 2014. That’s estimated to be about 150 million phones. In the meantime it will issue stickers as a “patch” for non-compatible Android devices.

What Comes First?

This comes after lots of speculation that Apple will integrate NFC in the upcoming iPhone 5. It also comes after Google itself already announced it will integrate NFC capability into all Android devices running Gingerbread (Android 2.3) or later.

NFC, for those unfamiliar, transmits a short range, high frequency signal to communicate with other devices. This can be applied to things like peer-to-peer communications, but the biggest opportunity will be offline payments where about $6 trillion is spent annually in the U.S.

Lots of moving parts have stood in the way, the biggest of them being a classic the chicken-and-egg dilemma. There’s device compatibility on one end and costly point of sale hardware on the other end. Retailer incentive to integrate the latter is a function of the former.

Android’s NFC integration mentioned above has been meant to essentially underwrite the acceleration of this chicken-and-egg game. And today’s move is parallel step to accelerate adoption on the retailer and payment processing ends.

Master Plan

But the biggest question is why? The answer is simply that offline payments facilitated by Google will boost advertiser ROI. In other words, it closes the loop on search — the biggest source of Google’s $30 billion revenue stream. According to our recent report on mobile payments:

Near term, this translates to legions of Android users carrying around fancy NFC technology with virtually nowhere to use it. But Google’s intention is to take care of the user end of the equation so retailers are compelled to adopt and install the proper POS hardware.

Why is Google doing this? If it can have some degree of ownership of the mode of transaction, it can create revenue streams through payment processing via Google Checkout. The same concept drives many of the companies entering mobile payments.

Google could also tie this into its core search business. If it can show that finished transactions resulted from paid search campaigns, a clearer ROI picture results. This translates to more advertising (97 percent of Google’s nearly $30 billion in annual revenues).

That last part (emphasis added), is Google’s biggest play here. Amid all the noise around online-offline transactions, clearer ROI on ad spend (via offers) could stand to benefit the most. That’s been a longstanding drawback of search and other forms of online ads.

In that way, mobile payments are a sort of holy grail for search. Google — relying on search for the vast majority of its revenue stream — just took a step closer to finding it. Add a dash of Android’s exploding market share, and the master plan starts to come into focus.

In that sense, this is one of the many — perhaps the biggest — endgames to the loss leader that is Android. Put another way, this is huge.

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