Google Inc. is reportedly developing an Internet payment service, but industry watchers say the online search powerhouse may be able to succeed where many challengers to PayPal Inc. have failed.
PayPal, a subsidiary of the San Jose online auction giant eBay Inc., has 71.6 million accounts, 22.1 million of which were used for transactions in the first quarter. It says it is used for 9% of U.S. and 5% of global e-commerce transactions.
Google, of Mountain View, Calif., posted $1.3 billion of revenue for the first quarter, surpassing eBay's $1 billion. Though most of Google's revenue comes from targeted Web ads, it also operates the shopping search engine Froogle.com.
Speculation that Google is working on a payment service emerged last week at a conference hosted by Piper Jaffray & Co. of Minneapolis, according to an article published Monday in The Wall Street Journal. Google would not discuss the speculation.
Safa Rashtchy, a senior research analyst with Piper Jaffray, wrote in a research note published Monday, "Some industry insiders believe that Google is working on a PayPal-like payment system and has been testing it with some e-commerce players already."
Amanda Pires, a PayPal spokeswoman, said, "We can't speculate on future products" from potential competitors, such as Google.
Several other financial companies have introduced online payment services that have since been folded; analysts say a key reason for PayPal's success is that eBay encouraged its customers to use the service.
"If you look at PayPal, the supporter for PayPal is eBay," said John Gould, a director of the consumer lending and bank cards practice at the TowerGroup Inc. unit of MasterCard International.
According to eBay, its auctions provide 71% of the payment volume for PayPal.
Chris Musto, a vice president for research at Watchfire GomezPro in Waltham, Mass., said the best way for Google to succeed in online payments would be to ignore auctions and focus on other transactions.
"Outside of auctions, PayPal is not the dominant payment alternative," he said. "More online commerce is occurring through each of the major credit card brands."
Mr. Rashtchy predicted that Google will develop a classified ad service in which its payment system would be used to place ads or buy products and services.
Mr. Gould said that other companies have already demonstrated that it is hard to create an online store or auction site to support a payment service. "Yahoo's done the auctions - other people have tried - and eBay has dominated."
However, he said that Google has a chance of competing with credit cards for the same reason that PayPal has found a niche there. "More and more, the merchants are really agitated around interchange, and they're seeking alternatives, and PayPal provides that."
Dan Schatt, a senior analyst for the Boston market research firm Celent Communications LLC, suggested that a Google payment service may not be aimed at unseating PayPal. "They don't have to be successful in creating that online community like eBay to fulfill their strategy," he said. "It's really all about the data." By controlling the payment, Google would have more data it can show advertisers to prove that ads on its service work.
