Android Pay, unveiled at the Google developers conference in San Francisco, brings together mobile carriers, payment networks, banks and retailers to allow smartphone users to use their handsets instead of payment cards.
Google engineering vice president Dave Burke said Android Pay would work in more than 700,000 US retail outlets that accept contactless payments.
"We are at the start of an exciting journey, we are working closely with payment networks, banks and developers," he said.
Similar to the Apple Pay system unveiled last year, Android Pay will allow consumers to store credit card information on their handsets along with loyalty cards and other data.
For extra security, Android Pay will generate a one-time "token" or virtual account number so the actual credit card data is not revealed in a transaction.
"Users can simply and safely use their Android phone to pay in stores where you see an Android Pay logo," Burke said.
"We are focused on simplicity, security and choice."
Google said in February it was teaming up with the mobile phone payment firm Softcard to ramp up its efforts in the emerging sector.
This will allow Google Wallet to become a pre-installed "tap to pay" app on Android smartphones.
No date was announced for the roll-out of Android Pay but the Google statement said it would be "available on Google Play for download soon."
Apple's iOS and Android rule the global smartphone market, and the companies are eager to be at the potentially profitable heart of shopping or other financial transactions as consumers go increasingly mobile.
- 'M' for major? -
Google announced that enhancements being built into a new "Android M" version of the mobile operating system include support for fingerprint-checking, which would match the feature built into Apple's latest iPhones and iPads for security.
"The things they announced today are good, but the 'M' doesn't stand for 'Major,'" Current Analysis research director Avi Greengart told AFP at the gathering.
"Some of the improvements are Google playing catchup in payments and fingerprint recognition."
Apple Pay also works with Apple Watch, essentially allowing users to pay with the waves of a wrist. The Android team gave no indication if their new Pay feature will extend to smartwatches.
Google did show off a slew of upgrades for Android-powered smartwatches, such as gesture controls and being able to distinguish between actions such as push ups and golf club swings.
"We love watches," Android Wear director David Singleton said during an on-stage presentation.
"They have always been this incredible mix of beauty and technology."
He said Google is partnering with an array of hardware makers to add to the current line-up of seven different kinds of Android smartwatches.
There are more than 4,000 applications tailored for Android-powered smartwatches.
The Apple Watch is fueling the emerging smartwatch market and is expected to be the top seller in the segment for next few years, according to a market research report released early in May.
Fun, functional or hip applications made by the kinds of software wizards packed into the Google developers conference here are seen as vital to the popularity of smartwatches and smartphones.