Samsung's Nexus S is currently the only smartphone capable of NFC transfers in the U.S. Photo: Jim Merithew/Wired.com

Silicon Valley wants you to do away with your old, beat-up leather wallet.

PayPal introduced its money transfer widget at the MobileBeat technology conference in San Francisco on Wednesday. PayPal’s new widget uses Near-Field Communications technology, which lets you pay for purchases with a wave of your smartphone.

PayPal’s widget allows for money transfers between two NFC-enabled phone holders. Say you want to transfer money to another PayPal user. They’ll request a specific amount of money from you on their phone, and after you tap your NFC-enabled phones together, the cash transfers from your PayPal account to the other.

“PayPal used to be an online company, but we see the majority of transactions are being substituted for offline transactions,” said Laura Chambers, senior director of PayPal’s mobile division, at the MobileBeat conference.

The mobile payments space is booming at the moment, with companies like Google, Intuit, Square and of course, the eBay-backed PayPal all competing for share over customer transactions. And all of them offer something a bit different. Google’s Wallet service will eventually let you pay for goods with a wave of your Android smartphone, while companies like Square aim for the small business crowd who want to accept payments from their mobile devices. Intuit offers services similar to Square, but you’ll be able to manage your taxes and sales info with integration into its existing QuickBooks accounting software.

PayPal’s money transfer offering is a relatively small step into the mobile payments space, and the company faces lots of challenges. For one thing, there’s only one NFC-enabled phone available in the U.S. — the Samsung Nexus S. Second, PayPal’s offering isn’t as major as Google’s: PayPal allows transfers between phones, while Google is pushing for installations of NFC-capable point of sale terminals in retailers around the country. So where PayPal lets you trade digital cash with a buddy, Google wants you to be able to buy items from stores.

PayPal isn’t taking kindly to its competitor. The company is suing Google over two of its former employees, Osama Bedier and Stephanie Tilenius. Both jumped over to Google in the past year to work on its mobile commerce initiative, Google Wallet. PayPal says Bedier had access to top PayPal secrets which he then shared with Google, violating his contract. Tilenius is also in violation of contract, says PayPal, because of recruiting Bedier.

Google debuted its wallet over a month before PayPal’s NFC transfer widget.

Chambers acknowledged the challenges, reminding that NFC is still in its infant stages.

“The barrier is less on the consumer side, as all the OEMs [original equipment manufacturers] say this is what they want to do,” Chambers said. “It’s expensive for merchants to integrate the hardware.”

But the technology is coming — eventually.

“No doubt that NFC for mobile payments is finally gaining some traction in the US,” said Phillip Redman, mobile analyst for Gartner research. It will be some time before mobile payments are standard, but no doubt, one day they will be, even in the US.”

Chambers agrees. “Probably by the end of next year, maybe early 2013, we’ll start to see critical mass,” Chambers said.

The company isn’t hedging all of its bets on NFC alone. Last week, PayPal bought Zong — a mobile payments company that allows you to bill your purchases to your wireless carrier bill — for nearly a quarter of a billion dollars.

And not wanting to be cut out of the loop, wireless carrier companies are also dipping toes into the mobile payments waters. In a joint venture created last year dubbed Isis, T-Mobile, Verizon and AT&T first aimed to create an alternative payments system which bypassed credit cards and allowed you to pay for items with your smartphone. Your stuff would then be billed to your mobile account, no credit cards necessary. But instead of defying the powerful credit card companies, Isis recently scaled back its efforts this year, opting for another form of ‘digital wallet’ instead.

PayPal’s NFC widget will debut later this summer. Check out the video below for how PayPal’s new transfer widget works.

PayPal Uses NFC to Make Peer-to-Peer Payments Easier Than Ever [PayPal]