By Leslie Walker
Post
Thursday, May 19, 2005; E01

Digital money pioneer PayPal is on the prowl.

Since eBay Inc. bought the Internet payment upstart for $1.5 billion in 2002, PayPal has grown at a heady clip, reeling in 71.6 million account holders who pumped $6.2 billion through its money-transfer system during the first quarter this year. The company claims twice as many accounts as Bank of America and recently surpassed Discover, too.

Yet PayPal's identity remains virtually inseparable from eBay, the auction market where it greases the wheels of commerce between strangers by letting them zap money to any e-mail address. Three-quarters of the goods and services swapped on eBay's U.S. site are paid for with PayPal, and auctions account for a large share of PayPal's $233 million in quarterly revenue.

EBay hopes that will change this year as PayPal rolls out a major marketing campaign to tout new payment services to larger merchants selling from sites independent of eBay. PayPal is expanding overseas, too, where it has introduced localized payment services in a dozen countries.

"We feel confident that PayPal can become the online wallet for an entire global generation of Internet shoppers,'' eBay chief executive Meg Whitman said in a recent conference call with analysts.

Yet some analysts remain skeptical that PayPal can become more than a niche player, servicing mostly auctions and tiny Internet merchants. They say PayPal's early advantages could dwindle as it moves into mainstream commerce, where buyers and sellers are accustomed to dealing directly with banks and credit card giants Visa and MasterCard.

A key test will come in June when PayPal introduces a suite of new services for merchants, including software to help them reduce the risk of online payment fraud, to integrate PayPal more tightly with their own Web sites, to customize check-out and offer other customer services.

PayPal already handles payments for a few large merchants, including the Napster and iTunes music stores, auction rival Overstock.com and electronics retailer TigerDirect. PayPal is hoping its fees, which it lowered last August and are well below those charged by traditional card processors, will attract more big merchants.

Yet the jury is still out on whether PayPal can create a truly global currency, one as linked in people's minds with Internet payments as, say, American Express is with travel.

"It's not easy to create a new global payment brand," said Jim Bruene, editor of the Online Banking Report newsletter. "If it was, PayPal would have already done it."

PayPal's system piggybacks on existing credit card and bank accounts, which customers can link to their PayPal accounts when they register. To send money, a buyer logs into PayPal and enters the recipient's e-mail address and amount they want to send. PayPal deposits the funds into the recipient's PayPal account and takes it from any source the senders choose -- their PayPal account balance, credit or debit account, or bank account. Last year, PayPal also added a line-of-credit option provided by GE Consumer Finance. While most recipients pay fees, all PayPal transfers are free to buyers.

PayPal spawned many rivals after it launched in 1999. Most have since died or disappeared, including Citigroup's c2it and Bank One's E-Mail Money. Just this week, Yahoo finished shuttering the last of its PayDirect money-transfer accounts, which it jointly offered with HSBC before deciding to close last November.

Beyond eBay, PayPal already added various features for other merchants, including donation boxes that blogs and other Web sites can add to their pages inviting readers to make donations.

"PayPal provides a fantastic way for small webmasters to be able to collect money,'' said Ina Steiner, editor of the AuctionBytes newsletters. One PayPal user is Los Angeles-based RotoWire.com, a fantasy sports service that sells online subscriptions to several thousand customers. Chief Operating Officer Tim Schuler said RotoWire accepts credit cards by phone and has its own merchant bank account, but for security reasons prefers customers to pay online via PayPal.

Customers who already have PayPal accounts can pay with a few clicks, while those who don't can register or simply enter their credit card number via a form PayPal presents when they go to pay. Either way, no credit card numbers or PayPal passwords are stored on RotoWire's computers.

"No one at my company could get access to those credit card numbers'' " Schuler said. "It is a huge relief to be able to tell customers, 'Your information is secure.' "

While PayPal has its share of problems with fraud and is a huge target for phishers -- crooks who send fake e-mails enticing people to reveal their personal data -- security has turned out to be one of its selling points. Buyers like not having to reveal their credit card numbers to unfamiliar sellers; some also enjoy the convenience of not having to reenter credit card numbers at different Web sites.

Of the available funding options, PayPal by default presents bank transfers to users who have given them their banking information, because those cost PayPal the least. Credit cards carry higher processing fees and currently account for a little more than half of PayPal's transactions.

But analysts worry that in the future, PayPal won't be able to persuade as many buyers to pay via bank transfers or their PayPal balances.

"If PayPal wants to move to the larger marketplace, some of their traditional pricing advantage will probably erode," predicted Robert J. Coolbrith, director of research for the Financial DNA consulting firm.

Dana Stalder, a PayPal vice president, doesn't believe that will happen. He said PayPal will encourage large merchants to continue accepting credit cards directly online. That payment option typically is placed alongside the PayPal button on Web sites of established merchants. "Roughly 9 percent of all U.S. ecommerce last year was through PayPal," Stalder said. "We think we can increase that share over time."

While many will doubt PayPal, so far it hasn't paid to bet against this e-mail money machine.

Leslie Walker's e-mail address iswalkerl@washpost.com.