In a challenge to credit card dominance in Internet purchases, X.com, the largest provider of person-to-person Internet payments, has quietly introduced a service that lets consumers buy merchandise without directly using a card.

The service - a consumer-to-business extension of the popular PayPal e-mail money-delivery service - operates in a closed environment that cuts credit card companies out of most of the action. Consumers open an account with X.com - either by depositing cash or making a credit card advance - and buy goods against those funds.

X.com, of Palo Alto, Calif., has signed up 2,100 Internet retailers for the new service, which made its debut Sunday with no marketing lead-up. These companies also must open a merchant account with the Internet bank - and they have a strong incentive to do so: X.com is offering lower interchange rates. X.com's fee is 1.9%, against the 2.9% that GartnerGroup Inc. says online businesses typically pay credit card companies.

X.com just bought PayPal's namesake developer. If the service for businesses catches on as quickly as the person-to-person version, it could become a threat to credit card merchant acquirers, which usually saddle online merchants with higher fees to make up for the added risks of operating on the Internet.

The person-to-person PayPal, which was introduced in November, has 1.6 million customers, and X.com says it is adding 15,000 accounts a day. Customers use the service to send small sums of money to friends, relatives, online auction trading partners, and others.

Online merchants find PayPal's large user base appealing. More than 10,000 businesses have requested to participate in the service since its launch, an X.com spokesman said.

With PayPal, businesses get 24-hour customer service and the ability to sweep funds from their X.com account back into their regular bank account at the end of each day for a 0.06% fee. Because payments are taken from funded accounts housed at X.com, merchants are assured they will be paid.

"This is going to be a huge market for X.com, because credit cards right now have a stranglehold on Internet payments on the consumer side," said James B. Shanahan, a partner in the Newark, Del., office of Business Dynamics Consulting. "If merchants really push this and incent consumers to use this, they can really take market share away from the credit cards."

Analysts agree that X.com's activities should be a cue to banks and credit card companies to develop similar products.

"This is one more line of writing on the wall that says that credit cards as a group, which represent a number of banks working together, need to find new ways to be more innovative and have services like these," said James Van Dyke, an analyst with Jupiter Communications of New York.

The analysts say established credit card companies should expect an influx of new players.

"Any company that offers Internet payments and has the means to develop a closed-loop system, either through having their own bank or from having enough adoption of their system - will do so," said Avivah Litan, an analyst at GartnerGroup of Stamford, Conn.

Mr. Van Dyke says a major drawback to PayPal is that buyers are not protected from fraudulent merchants. In contrast to the standard credit card process, there is no recourse for consumers who buy products but never receive them.

"It is questionable whether this will be attractive to a mainstream audience," he said. "The key is to find areas where people don't have the traditional trust barriers in mind."

X.com expects to receive a bank charter by yearend. The rapidly growing company has opened a new service center in Omaha with 200 service representatives already hired and 300 to be added by the end of the summer.

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