Google and PayPal: Friends and Rivals

  A couple months ago, Scott Fluhrer, founder of Miami-based RoseSource.com, says he learned that Google, the Internet search engine, had just launched a payment service called Checkout. RoseSource.com for more than three years has been shipping flowers from farms in South America to customers in the United States, Canada and Europe, some of whom found the business through a Google search.
  So Fluhrer jumped at the chance to offer his customers the option to use Google for payment. "Google has a large enough following that it can boost sales," Fluhrer says.
  Google's entry into the online payments space represents a potential threat to PayPal, the San Jose, Calif.-based subsidiary of, and payment mechanism for, the Internet auction giant eBay Inc. PayPal officials, though, say Google first has to prove Checkout has staying power.
  In June, Google had 453 million visitors, more than any other Web site except Yahoo!'s and Microsoft's, according to comScore Networks, a Reston, Va.-based company that ranks Web sites. Anyone looking for a florist on Google can find the ad for Fluhrer's company, whose Web site now has a little green shopping-cart icon that lets shoppers know they can complete transactions with Google Checkout.
  Buyers register their credit card information with Google online and, when they want to make a purchase from a participating merchant's Web site, they just enter a password after clicking on the shopping cart icon. Fluhrer says that avoids the biggest obstacle to e-commerce: customer fears that careless merchants will allow thieves to steal their card numbers.
  "We don't keep credit card information," Fluhrer says.
  Fluhrer says it is too early to know if Google Checkout has increased sales, but since adding it was free, he is not worried.
  Some experts say the June 29 launch of Google Checkout by the Mountain View, Calif.-based company could cut into PayPal's dominance of the online payment service. "[About half of Internet] searches are done with the idea of finding something to purchase, and it's a natural extension for Google to help facilitate payments for goods and services," says Dan Schatt, senior analyst at Celent LLC, a Boston-based research firm.
  Currently, eBay is the site of choice for consumers looking to buy products over the Internet, with about 250 million visits in June, according to comScore. But if enough merchants sign up with Google, the ability to search and purchase with a few clicks could make Google's search engine the top online marketplace, Schatt says.
  Other observers wonder if Google will fully commit itself to Checkout. The cash-rich company has designed and launched dozens of new products in recent years, including a book directory, a business-information service, and a Web site that provides maps and directions. The company has a "bottom-up" strategy that is receptive to "any engineer with a good idea," says Paul Saffo, a Silicon Valley technology forecaster.
  But sometimes Google, after launching programs with great fanfare, loses focus on some of its many offerings. Checkout might be different, however, Saffo says, since it seems so complementary to the search function. Still, he "is taking a wait-and-see attitude."
  EBay responded quickly to Checkout's unveiling. Within a week of the launch, it banned its sellers from offering Checkout as a payment option. EBay only allows its sellers to offer payment options that have a historically proven track record, an eBay spokesperson says, noting that "Google does not meet this criteria at this time."
  Google officials defend their payment expertise. "Over six years, we've collected billions of dollars [from advertisers]," says Benjamin Ling, product lead for Checkout, noting Google has done so with the security required by eBay.
  RESERVING JUDGMENT
  However, just before the launch of Checkout, Charlene Li, an Internet analyst with Cambridge, Mass.-based Forrester Research Inc., wrote on her blog that "it's one thing to serve several hundred thousand advertisers paying for their search ads, and quite another to serve potentially millions of consumers." While the Google brand name should inspire confidence, Li is reserving judgment until the company proves it can handle virus attacks and other payment problems.
  Google and eBay make strange rivals. EBay is one of Google's largest advertisers, and Google searches frequently bring potential buyers to eBay sellers.
  The eBay spokesperson says Internet providers frequently clash and cooperate at the same time. Their users engage in a lot of different behaviors, including advertising, searching, and buying and selling. So they frequently need to jump from one site to another. "It's all par for the course in the Internet space," the spokesperson says.
  For example, eBay's Checkout ban might fall because of pressure from eBay's own merchants. If Checkout becomes popular among consumers, eBay will have to either allow it or watch their merchants flee to Google's system, Schatt says. "I don't think they'll have a choice," he says.
  Before that happens, however, Google has to entice consumers into making "the leap of faith needed to trust it with their financial information," Schatt says.
  PayPal, Checkout and other online payment vehicles keep personal financial information on secure, encrypted Web sites. And, since buyers do not have to retype their information with each purchase, it is safer for them and the merchant, Fluhrer says. Some fraud software enables crooks to capture computer keystrokes.
  Although only a small percentage of his buyers use either Checkout or PayPal, Fluhrer hopes the numbers rise. "Anytime someone uses our merchant account, they're entering their credit card information over the Internet," he says, increasing the chance for theft and chargebacks.
  PayPal, however, has been around far longer and has proven itself "very secure," Fluhrer says. "I would say it's even better than Visa or MasterCard," he says.
  In addition, says Schatt, PayPal has a good record of settling disputes when fraud occurs, and it has developed trust with consumers.
  Founded in 1998, PayPal's early years, primarily before 2001, were marred by individuals who used the service to commit fraud, a PayPal spokesperson says. In response, PayPal spent $200 million in venture capital to develop anti-fraud protection.
  Today, "one of [PayPal's] core competencies is security," says Schatt. "They have one of the lowest fraud rates in the industry."
  In 2005, only 0.27% of PayPal's total of more than $27 billion in transactions was fraudulent, the company's spokes-person says.
  Google has made some smart moves, Schatt adds, such as hiring Chase Pay-mentech Solutions LLC as its processor and recruiting highly regarded technical staff from payment gateways. If Google can show it can manage payments effectively, the little green Checkout logo should win consumers' confidence, he says.
  Rose-Source.com's Fluhrer believes Google's size and resources give it credibility. "My understanding is it's similar to PayPal," he says. "I'm not worried."
  PAYPAL 'DIFFERENT'
  Checkout has been up and running only for a few months, and experts say it is too early to judge its success. But Schatt does say he has noticed that merchants of all sizes have adopted the Google service, from small outlets such as RoseSource.com to such giants as Starbucks, Levi's and Buy.com.
  PayPal officials say they are unfazed by the challenge.
  "We really believe what we do is quite different," says the PayPal spokesperson. She points out that Checkout only allows purchases with major credit cards and only between buyers and established merchants. PayPal allows payments with credit or signature-debit cards or through automated clearinghouse (ACH) debits from checking accounts. It also supports PayPal-branded credit and debit cards and facilitates person-to-person payments.
  The latter is especially important for eBay, whose online auction site connects millions of independent buyers and sellers.
  And just as Google began to establish its Checkout function, PayPal use soared among merchants. While most of PayPal's transactions still occur between eBay users, merchants outside eBay completed $3.1 billion in payments with PayPal in the second quarter of 2006, or 35% of PayPal's total and a 60% increase over the same period in 2005, company statistics show.
  Furthermore, with 114 million user accounts in 2005, accounting for 10% of all e-commerce in the United States, PayPal is "quite comfortable with our position," the spokesperson says. "To date we've seen no impact on our business," she says.
  But eBay and PayPal are not sitting still. In May, they announced a partnership with Yahoo! that eventually will make PayPal Yahoo!'s exclusive online payment mechanism. In turn Yahoo! has agreed to put more ads on eBay's site, the PayPal spokesperson says. But the partnership is only in the testing phase, which will last at least until 2007.
  Google officials can tout a cheaper transaction cost. PayPal charges sellers between 1.9% and 2.9% of the sale plus 30 cents per transaction. Google sellers pay 2% plus 20 cents for each of their sales.
  Also, for every $1 spent on advertising each month, the retailer can process $10 in sales the following month through Checkout for free, Ling says.
  Still, Google's core business is not payments, and the company's aim is not to build a rival payment system but to use Checkout as a way to attract advertising to its search engine, Schatt says. "[Checkout] doesn't have to be profitable if [Google] can boost spending on their ads," he says.
  "We don't think about [Checkout] as a stand-alone feature," Ling says.
  Checkout is meant to complete the search function by helping buyers quickly purchase the products they find. Hopefully, the quicker conversions will enable merchants to sell more products and services and buy more advertising, Ling adds.
  Ling says Google is open to offering other forms of payment, including ACH, but has not made any firm decisions.
  Many experts contend Google might use Checkout to re-engineer its business model. Advertisers pay Google every time someone clicks on one of their ads. But Google could charge more if it can show advertisers that those clicks become purchases, Schatt and others say.
  Fluhrer says RoseSource.com pays Google 50 cents each time someone clicks on its ad during a Google search. But the possibility of switching to a pay-per-purchase system has tremendous appeal.
  "I'd love that; that would be everybody's dream," Fluhrer says.
  Ling says Google will consider pay-per-purchase. "It's a really interesting idea," he says.
  Google's Checkout offers an interesting alternative to PayPal. But Checkout still must show it has PayPal's staying power and ability to secure market confidence.
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