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As expected, Google just announced its mobile payment system called Google Wallet at a press event in NYC. This was accompanied by the wider rollout of the parallel mobile offers program, Google Offers (previously only live in Portland, Oregon).

Wallet will bring together embedded NFC technology and payment processing partners to let mobile users make payments by swiping their phone at physical stores. Users can tie existing credit cards to the product, though MasterCard is currently the only partner. Google is advertising it as “open” so that other payment networks, carriers and banks can join. Many will.

In the meantime, it will work with MasterCard Paypass, which currently has 300,000 compatible merchants worldwide (120,000 in the U.S.). It will also work with “Gcard,” which is a Google branded pre-paid card underwritten by MasterCard. This will all roll out in San Francisco and New York with nationwide access coming soon.

As for hardware compatibility, Google has been pushing NFC in Android and announced today that 50 percent of smartphones will have NFC built in by 2014. that’s about 150 million phones. Security-wise, there are multiple layers including phone lock, a pin and credit card encryption (number is never displayed).

As for Google offers, this ties into Google Wallet by letting you save offers you see online and offline. Those offers are applied automatically when the payment is made via Google Wallet. Retail launch partners are Macy’s, Subway, Walgreens, Toys R Us and others.

Google explained that this will initially include daily deals but will expand into things like check-in offers. But most of all, the automatic and passive nature of redeeming offers through a transaction will be a winning formula. Like the trial Foursquare did with AMEX at SxSW, it alleviates longstanding adoption and redemption challenges.

Along with Google’s cache, reach and exploding Android penetration, this will be huge. Stepping back, it will be a major boon for the overall mobile payments market and adoption of NFC. As we’ve written, this is a classic chicken-and-egg dilemma involving compatible devices and POS hardware.

But most important, for Google this is all about search. Payments will alleviate the longstanding challenge of closing the loop on advertiser ROI for search spend. Make no mistake, that’s the biggest play here and it’s a holy grail for Google. A longer analysis of that angle to come shortly.

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