Near field communications (NFC) is the kind of wondrous future-tech that promises to bring new convenience to every-day chores like shopping for groceries or fueling up at the pump.  Japanese customers have already been using NFC-enabled cell phones as credit cards for several years.

Now Google, Inc. (GOOG), makers of the world's top smartphone operating system, Android, have announced than NFC will soon arrive for American consumers. 

The announcement was made at the Web 2.0 Summit by Google CEO Eric Schmidt, who will step down as Google's CEO next Monday.  Web 2.0 is an annual internet-aimed conference held annually in San Francisco, Calif. since 2004.  The company had previously expressed interested in NFC payments, but had failed to fully elaborate on how it would execute the billing scheme.

I. Credit Cards on Your Phone

Initially Google has selected two corporate partners in the credit and banking industry -- MasterCard, Inc. (MA) and CitiGroup, Inc. (C).  

CitiGroup claims to be the largest issuer of credit cards in the world with its Citi Cards.  Much of the company's business is outside the U.S.  MasterCard is second to Visa (V) in the U.S., with 171 million credit cards and 123 million debit cards active within the U.S. [source].

As with standard cards, a fee will be charged to businesses.  It's unclear at this point whether the cardholders (customers) themselves will pay any additional periodical or spot fees for the service.

What Google did make clear is that it is not getting a cut of any fees from the card.  

It is offering the service for two reasons.

The first is that it makes an attractive selling point for its smartphones.  Top competitors Apple (AAPL) and Research in Motion (RIM) lack billing service on their popular U.S. models.

Secondly, Google will track your purchases and says it may use them to try to better target ads or discount offers at your phone.  

As traditional advertising begins to fade, targeted advertising is a booming business.  By direct ads that customers might actually care about, for example local sales or sales on items the user typically purchase, the uptake rates are far higher.  Everyone from U.S grocery chains like Kroger, to internet giants like Google, eBay/PayPal, and Facebook are deeply involved in the field.

The dark side of data mining is that more of your information will be stored with the potential for compromise.  While Google and others have engaged in efforts to anonymize data to a degree, advocacy groups and U.S. government officials have expressed concern about data mining and suggested possible legislation to limit its scope.

For now customers choosing to adopt the new Android service, will find themselves jumping deeper into Google's data mining bid.

II. Android Arrival is Imminent

The new service is supported by operating system APIs in Android 2.3 "Gingerbread".  

Gingerbread is Android's latest operating system version, which features user interface refinements, battery life improvements, increased web standards support, and improvements to the OS's copy, cut, and paste routines.

The Software Development Kit for Gingerbread rolled out to developers in December.  Motorola and Samsung appear to have advanced builds of Gingerbread ready for their smart phones whenever carriers decide to throw the switch.  Builds for Motorola's Droid X and Droid 2 and Samsung's Galaxy S smart phones have leaked in recent weeks.

Currently Gingerbread is exclusively available through official channels on Google's Nexus S, which went on sale in December of last year.

NFC requires special hardware, so it's unlikely that phones like the Galaxy S would be able to support the new technology.  For now the Nexus S appears to be consumer's best bet for getting access in the near future.

III. What is NFC and Where Can You Use It?

Near Field Communication relies on an active device (like a key fob or your phone) acting as an active (powered) sender and sending a signal to a passive receiver.  Typically the receiver is located within 4 cm of the sender in order to properly receive the signal.

The technology operates at the 13.56 MHz frequency, well below the frequency band commonly used with Wi-Fi, 2.4 GHz. 

The technology was developed and licensed by Dolby Labs' subsidiary Via Licensing Corp.

Currently one of the largest makers of NFC readers is Verifone Systems, Inc. (PAY).

There are actually thousands of such devices already employed across America.  Examples include checkout devices that you tap your card against and gas pump charge devices you tap a key fob against.  With the new deal, you could theoretically use your compatible Android smart phone with most of these devices.

You may need to have your license ready to present for larger purchases, as with credit cards, to confirm your identity.

A recent Federal Reserve sponsored study [PDF] stated that there were 150,000 NFC readers installed at locations across America.  And the study claimed Americans own 70 million NFC enabled devices -- largely credit cards.

A MasterCard sponsored survey by Edgar, Dunn & Co. suggests mobile payments, the field that NFC billing falls under, will swell to a $618B USD market by 2016.

It's unclear how the device will coexist with the upcoming Isis billing system from Verizon Wireless (VZ), T-Mobile (Deutsche Telecom: DTE), and other players.  It appears, at present, that it will compete with such a system.

While wireless billing will almost certainly land on the iPhone, on Blackberries, and on the Windows Phone 7 platform in the near future, it appears that Google will be the first smart phone OS maker to leverage this fascinating, if a bit scary technology. 

The technology is thought to be relatively secure; it would likely take more effort to steal your card digital via NFC trickery than it would to steal your card information from a corporate database.