Googles online payments takes on PayPal

It looks like Paypal has some serious competion in the online payment arena, in comes Google.

Souce: USA Today - Jefferson Graham

Google is offering merchants free use of its online payment service as it squares off against eBay's market-leading PayPal.

The Internet search giant introduced Google Checkout in June, with sweeteners such as free ad credits for merchants. In November, it began offering rebates to consumers, $10 off $30 purchases. PayPal quickly matched the offer.

On Wednesday, Google ratchets up the pressure by dropping merchant fees through 2007.

"I'm thrilled," says Lanny Morton, whose Sportscloseouts.com uses both Google Checkout and PayPal. "The online business is really competitive, and every little percentage helps."

Merchants pay a variety of fees to use the services. PayPal charges 2.9 percent plus 30 cents per transaction on sales up to $3,000 a month. Google's fee is 2 percent of the sale plus 20 cents, less if the merchant is a Google advertiser.

"Google has the potential to own this market," says Fred Lerner, president of photo print and accessory site Ritz Interactive, which uses Checkout. "PayPal is essentially laying down and letting Google buy market share."

Google's consumer rebate can be used many times. The PayPal rebate expired in November, but the company is offering a one-time-use discount to selected customers via e-mail. Some stores may offer extra incentives through either service.

EBay had no comment on Google's plans.

Benjamin Ling, the Google executive who runs Checkout, says it was not designed as Google's answer to PayPal but as a way to cut down on the steps (registering, typing in credit card and shipping information) needed for consumers to complete a purchase.

Once consumers sign up for Google Checkout, they can make purchases with one or two clicks.

The company decided to drop its merchant fees for now as a way to induce more businesses to try Checkout. "Once people use our service, they love it," Ling says.

Ling says "thousands" of merchants use Checkout, including Toys 'R' Us, Buy.com and Ritz.

Google won't say how many consumers have signed up for Checkout accounts.

PayPal says it has 123 million consumer account holders. It doesn't disclose merchant account figures.

"In a retail sense, using Checkout as a loss leader to get market share works for Google, because they will make it up with more advertising, which is highly profitable," says Martin Pyykkonen, an analyst at equity firm Global Crown Capital.

EBay, however, has reason to be concerned, he says. "Twenty-five percent of eBay's profits come from PayPal, so any pricing pressure isn't a positive."