CheckSpace Inc., a provider of Internet payments to small businesses and their customers, is prepared to wage war against PayPal Inc., the Palo Alto, Calif., company that leads in person-to-person electronic payments.

Naseem Tuffaha, chief executive officer and co-founder of CheckSpace, said banks will be his one-year-old company’s main venue for gaining market share against PayPal. CheckSpace of Bellevue, Wash., plans to market its products to financial institutions, which could then offer them to small-business owners to keep them from defecting to PayPal.

CheckSpace is expected to announce this week that it has partnerships with Compubank and Mellon Bank, and Mr. Tuffaha said he is discussing partnerships with at least 10 other financial institutions.

“In the long term, we think banks are going to win” their battle against PayPal, said Mr. Tuffaha, 29, who founded CheckSpace last March with Bassam Saliba, 32. (Both are former Microsoft employees.) “They have established, trusted relationships with their commercial customers. We plan to arm them in that battle with PayPal.”

PayPal, which requires customers to open separate PayPal accounts in order to e-mail payments, has stimulated concern among financial institutions for its potential to encroach on the bank-run payment network. The three-year-old company processes 150,000 transactions daily and has a customer base of six million.

Banks’ fears that PayPal will attract small-business customers have grown since it announced in December that it would offer payment processing through Intuit Inc.’s QuickBooks small-business accounting software.

CheckSpace, which also integrates with accounting software such as QuickBooks and Microsoft Office, supports Internet payments between any two parties with e-mail addresses and U.S. checking accounts. It charges recipients 95 cents per transaction and offers payment and receipt displays, cash management tools, and e-mail alerts notifying customers when payments are due or scheduled to arrive.

Compubank of Houston has hired CheckSpace to be its sole e-payments provider. Charles Boyd, executive vice president of product development and management at Compubank, said he expects the partnership to help it attract and retain customers.

“We believe that most people would want to deal with a bank as opposed to an outside entity,” he said. “We probably have a tighter relationship with our customers than a PayPal would.”

Mellon Bank will give CheckSpace access to the automated clearing house and a link to MasterCard’s remote payment and presentment service. This will let CheckSpace customers send electronic payments to large billers such as phone and cable companies.

Scott Anderson, a director at Global Concepts Inc., an Atlanta payment systems consulting firm, said many banks still prefer check-based payments. Electronic payment systems require costly infrastructure investments and offer less revenue potential, he said.

“People have a problem with paying fees to do things online because everyone thinks the Web is this great economic panacea that makes everything free, but it’s not,” he said. “As much as the industry loves to hate the check, the check pays the bills through service charges and fees.”

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