Hewlett-Packard Co. is letting customers pay for online purchases through PayPal Inc. of San Jose.
The deal is the third the eBay Inc. unit has announced with a large merchant in two months.
Late last month Hewlett-Packard began using PayPal's Express Checkout service on its Web site. The service, designed to streamline the checkout process, allows buyers to authorize transactions without leaving a merchant's Web site.
Barnes & Noble Inc. and 1-800-Flowers.com Inc. began using other PayPal services in August.
PayPal has long said that it wanted more such agreements with merchants. However, with a few notable exceptions, it has had little success in landing them.
Apple Computer Inc. and Hotwire Inc. began using PayPal in 2004, and Dell Inc. followed at the end of last year. Still, 65% of PayPal's transaction volume comes from eBay auctions, according to the parent's second-quarter earnings statement.
Todd Pearson, PayPal's senior director for merchant services, said that it would not have been able to make deals with any of the large merchants before it sold itself to eBay in October 2002 for $1.5 billion.
PayPal had to overcome several hurdles in its early history, he said.
One of them was Billpoint, a competing person-to-person payments system that eBay had developed with Wells Fargo & Co. But by the time PayPal was acquired, it had already become one of the dominant payment mechanisms for eBay's auctions, and eBay shuttered Billpoint after the acquisition.
Though PayPal has always wanted other merchants to use its services, its early success in eBay auctions was critical, Mr. Pearson said.
"Without eBay, we could not have really prospered at the time," he said. "EBay was the heart of the company, of PayPal, in that that's where our business was."
The acquisition, and the position as the preferred eBay payment service, allowed PayPal to devote more energy to courting other merchants and investing in merchant services, Mr. Pearson said.
According to Gwenn Bezard, a research director at Aite Group LLC of Boston, before the acquisition almost 10% of PayPal's revenue came from online gambling sites, but eBay moved quickly to shut down those relationships.
However, Mr. Pearson said eBay also encouraged the unit to expand in other areas.
In 2002 it began introducing products for non-eBay merchants. The first was WebAccept, which enabled merchants to put a link to PayPal's site on their sites. Customers needed PayPal accounts to use the link.
The following year PayPal rolled out WebAccept Express, which allowed merchants to accept PayPal payments from customers who do not have PayPal accounts. "We would not force account creation," Mr. Pearson said. "That was the first big thing."
WebAccept and WebAccept Express have since been rolled into the Website Payments Pro package, which includes Express Checkout.
Another important development in 2003, he said, was application program interfaces, which enable PayPal's code to work with the software large merchants use for inventory management and customer service. The interfaces give merchants' employees limited access to their employers' PayPal accounts and made it tougher to abuse the accounts, he said. For example, employees can issue a refund through customer service software rather than through PayPal's site.
The tools were major factors in the deals with Apple, Hotwire, and Dell, Mr. Pearson said. "You just can't serve a larger merchant without APIs."
Mr. Bezard said PayPal got where it is today not because of the freedom eBay granted, but as a result of its own momentum.
"PayPal was growing very fast before the acquisition by eBay," he said. "That's why eBay bought PayPal."
It would have been easy for eBay to shut down PayPal's nonauction operations, as it did with the casino relationships, Mr. Bezard said. In fact, that decision made him believe at the time that eBay would put even more restrictions on PayPal.
However, it was in eBay's best interests to encourage PayPal to expand, he said. "EBay has had slowing growth in the U.S., its core market. EBay was looking for new ways to grow ... [and] PayPal, as a component of the business, has been increasingly seen by the management of eBay as a growth engine on its own."
