Many Competing Paths on the Road to a Phone Wallet The idea of using a smartphone as a wallet has been slow to catch on in the United States. A big part of the problem has been that most stores do not have the proper physical equipment to allow customers to pay by tapping their phone. These stores also do not have the right equipment to allow the use of smart cards, credit cards embedded with computer chips that are much less susceptible to fraud. But a change is coming that will push both innovations at the same time. Merchants are facing heavy pressure to upgrade their payment terminals to accept smart cards. Over the last several months, Visa, Discover and MasterCard have said that merchants that cannot accept these cards will be liable for any losses owing to fraud. "Everybody is going to be upgrading," said Jennifer Miles, an executive vice president at VeriFone, which provides payment terminals to most merchants in the United States. While updating the terminals for smart cards, VeriFone also plans to upgrade for smartphone wallets, providing the capability for near-field communication, the technology used by the Google and Isis wallets, the two biggest smartphone wallet projects. Before the credit card companies made their announcements, almost no merchants were buying terminals with smart card and N.F.C. capabilities, Ms. Miles said. As of January, though, VeriFone stopped installing terminals that did not have N.F.C. readers. Moving to N.F.C. is a windfall for VeriFone, considering that the new systems cost 10 to 30 percent more than standard ones. It is also a boon for Google and Isis, a cooperative venture of AT&T, Verizon and T-Mobile. Google Wallet has been severely limited by a lack of N.F.C.-enabled merchants and phones. Isis, meanwhile is planning to start service later this year in only two cities, Austin, Tex., and Salt Lake City. It picked Salt Lake City largely because its public transportation system had already installed N.F.C. readers, said Ryan Hughes, the chief marketing officer at Isis. "This was a gift, to be honest, that was sitting under our Christmas tree that we didn't anticipate," he said, of the recent moves by the credit card companies and VeriFone. Ms. Miles of VeriFone now believes that N.F.C. could be completely mainstream within five years. While that sounds speedy by some standards - she notes that debit cards took about four times that long to take hold - other companies pursuing mobile wallets are not willing to wait. Square, a start-up founded by Jack Dorsey of Twitter, has gained a foothold among small merchants by distributing a free credit card swiper that attaches to a smartphone or tablet, allowing these swipers to serve as their own payment terminals. The company now sees its relationships with merchants as a way to promote its own mobile wallet application, which it revamped in March. Called Pay With Square, the app tells users which merchants nearby accept Square. When a customer enters those stores, the application alerts the merchant, who can then accept a payment by confirming the person's identity through the photograph associated with the account. PayPal meanwhile, is trying to move its popular online commerce accounts into the physical world. It recently began passing out Square-like devices, although its version is triangular. In addition to credit cards and checks, PayPal's system also allows merchants to accept payment via PayPal accounts by typing in their personal identification number. Both PayPal and Square say that asking customers to buy N.F.C.-enabled phones and wait for merchants to install new hardware is folly. Neither company says it has plans to incorporate N.F.C. into its wallet. "If I were a device manufacturer, or a device operator, and that was the tool that I had at my disposal to enter the payments market, that might be the thing I pushed," Sam Schrauger, PayPal's former vice president for global products and experience, said in an interview shortly before he left the company in April. But the other systems have inherent weaknesses as well. Because they rely on a wireless data connection, they are vulnerable to service interruptions. Also, some analysts question whether passing out free hardware will be tenable once merchants have to accept smart cards, because these readers are expected to be significantly more expensive to manufacture.