PayPal Inc. is reportedly planning to launch a mobile card reader that could help its nascent point of sale payment system reach small merchants.

PayPal has been aggressively promoting its digital payment system as an option at the point of sale. Its tests so far rely on large retailers that use point of sale equipment provided by major vendors like Ingenico SA and VeriFone Systems Inc.

PayPal could displace card issuers if it can convince consumers to use cheaper funding methods in retail stores. With online payments, PayPal aggressively urges consumers to fund purchases with automated clearing house transfers instead of pricier credit card payments.

For PayPal to reach ubiquity at the point of sale, it would need an offering for the ultra-small merchants that rely on off-the-shelf products like Square Inc.'s mobile reader. To serve that audience, PayPal is expected to unveil a card reader similar to Square's device, the tech blog GigaOm reports.

PayPal spokesman Anuj Nayar said his company would not comment on speculation — but he added that an announcement of some kind would be coming this week.

"We are having a major event on Thursday where we are going to unveil what we consider the future of commerce for small businesses," he wrote in an email.

PayPal, a unit of eBay Inc., said last week that it is also planning a redesign of its website to showcase newer products.

"Physical-world payments are inevitable for PayPal, and this solution fits in nicely because the company's roots are in micro-merchants…which is also where Square found its traction," says James Van Dyke, president and founder Javelin Strategy & Research in Pleasanton, Calif., in an email.

"In physical-world card payments, the payments networks have achieved meteoric gains in profitability by upgrading many cardholder transactions to premium card offerings, which earn higher interchange for the bank yet cost the merchant more," Van Dyke says. "PayPal has scary potential to do just the opposite to the banking industry."