Google phone revealed at Web 2.0 Summit 2010, photo via YouTube

Google’s CEO Eric Schmidt announced that the next incarnation of smart phones will be launched in the next few weeks."This could replace your credit card," Schmidt said, pulling out of his coat pocket a prototype of a Nexus S smart phone that uses an upgraded Android 2.3 operating system from Google, code named Gingerbread.

This next generation of phone can handle near-field communication microchips that store a user’s credit card information. A consumer equipped with this new “tap-and-pay" technology could choose an item in a store and buy the product by tapping their phone near an electronic reader when asked for payment.

At last week’s Web 2.0 summit in San Francisco, Schmidt declared that the credit card companies have already tested the phone and believe the technology is more secure than traditional plastic.

Brian Kilcourse, managing partner at Retail Systems Research and a leading expert in retail technology, thinks that a number of technological forces have combined in a powerful way that makes it clear that smart mobile devices will be adopted massively and quickly as a preferred method of payment.

Kilcourse cites one example where Visa and Bank Of America have run a test program around New York City. Customers can use their NFC (near field communications) enabled smart phones for payments at drug store chains like CVS and Walgreens, and franchised fast-food chains Burger King and McDonalds.

Credit card companies are worried about the entry of a new type of competitor, wireless phone service providers. Telephone companies are jumping into the fray of using tap-and-pay technology in a major way, and at a national level. “AT&T and Verizon have formed a joint venture called ISIS to compete with the traditional payment networks for the emerging mobile payment market,” observes Kilcourse. ISIS will be run by former chief marketing officer of GE Capital, Michael Abbott.

Another potential threat that has credit card companies scrambling to be in the mobile wallet game is PayPal, which in October revealed an Apple iPhone application that has location-based features. Users can buy a product at a local brick and mortar store through what the company calls PayPal X. Not only do stores benefit right away from customers using the convenience of the application but local stores also benefit down the road. Stores can target the same PayPal users with special offers to get the customer back. Kilcourse argues, “Visa, Mastercard, and American Express have (finally) recognized that they continue to ignore Paypal’s progress in the mobile payment space at their peril.”

Kilcourse thinks that the existing ubiquity of smart phones makes the general public already quite receptive to the new payment technology. There is a growing number of consumers who carry mobile phone everywhere and are used to bumping their phones when prompted to perform certain functions.

Related reading:

• Notes from Web 2.0 Summit on new Google phone technology, Tech Trader Daily
• Next Google phone will be a mobile wallet, AFP
• Convenience Stores report on the Google Credit Card, NACSOnline
• Nexus S Tap-and-Pay Smartphone explained, InfoSyncworld
• Forces pushing the finance world to mobile payments, Retail Systems Research
• Bank of America tries out payment stickers on mobile phones, Gerson Lehrman Group
• Telcos announce first national mobile payments network via ISIS, PaymentsDeepDive blog
• Who wins with NFC-based mobile payments? Netbanker.com
• Google CEO sees phones replacing credit cards, SFGate.com