The revamped service will let users make purchases at physical stores.
Google is overhauling its approach to mobile payments with Android Pay, which will let people use their smartphone to make payments in brick and mortar stores as well as in apps like Lyft and GrubHub.
The changes are an effort by Google to reclaim momentum in mobile payments, where Apple Pay has been taking hold and other rivals like Samsung's LoopPay are emerging. It also signals a new role for Google Wallet, its existing payments app.
Android Pay will be incorporated into the next version of Android, currently known as Android M, which was unveiled at Google's I/O conference for developers in San Francisco Thursday. The service will also work with previous versions of Android as far back as KitKat, said Dave Burke, VP of engineering at Google.
Much like Apple Pay, the service will allow people who've set the app up on their phone to walk into a store and wave their device in front of an NFC reader to make a purchase. Google is working with 700 stores across the U.S. that accept contactless payments, including Bloomingdale's, McDonald's and Subway.
Android Pay will also allow in-app purchases, so a person can order a car from Lyft and pay for it from within the app, Burke said.
And because Android M will standardize a way for developers to incorporate fingerprint recognition, phone users will be able to confirm purchases using a thumbprint. Target, for instance, is developing an app that lets you confirm a payment with a thumbprint.
Google is working with credit card companies including Discover, Visa, MasterCard and American Express, and with carriers like T-Mobile, AT&T and Verizon, so people can use Android Pay right away when they leave the store, he said.
Users set up the app by first entering their debit or credit card information, but, like Apple Pay, it gets converted to a "virtual" account number, so their actual credit card details aren't transferred during the transaction, a measure to improve security.
Android Pay, first announced in March, was initially positioned as a way for developers to add payment capabilities to their apps, but not for in-store payments.
With the arrival of Android Pay, Google Wallet will become an app for making payments between individuals, Google spokeswoman Anaik Weid said after the keynote. With a credit or debit card linked to the app, they'll be able to transfer money to other Wallet users for free.
Wallet users eventually will no longer be able to make payments in stores, with that functionality to be covered by Android Pay. They'll be prompted to update the Wallet app to get the new peer-to-peer payment functionality later this year when the changes go into effect.