Google Steps More Boldly Into PayPal’s Territory

SAN FRANCISCO, Dec. 19 — Steven Grossberg, who sells video games online from his home in Wellington, Fla., recently sent an enticing offer to 20,000 customers: off any purchase over using a new payment service, Google Checkout.

Traffic on his site more than tripled, and best of all, he said, Google picked up the tab for the promotion.

“I think it’s fantastic,” he said. “I’m selling the product. Google is getting tons of customers to sign up for Checkout. Customers are happy because they are getting a monster deal.”

And Google is not charging merchants any processing fees through the end of 2007.

As a result, getting customers to use Checkout will increase profits, Mr. Grossberg said.

So starting next year, he plans to take some of the money he spends to list items on eBay and try a new marketing strategy: placing ads alongside Google’s search results.

That is exactly what Google wants to hear.

When Google introduced Checkout in June, it was seen as a formidable rival to PayPal, eBay’s online payment service. And with Google aggressively promoting Checkout during the holiday season and beyond, its use with some merchants has already surpassed PayPal’s.

But Google’s plan for Checkout has always been about more than online payments. The service is a calculated effort to expand Google’s base of advertisers, which provide the bulk of the company’s revenues.

And Google has made a substantial financial commitment to the service’s success. Goldman Sachs estimates that Checkout promotions will cost Google about million in the current quarter.

The campaign to promote Checkout also says something else about Google: As rivals Yahoo and Microsoft are working on getting the basics right in their search and advertising systems, Google is racing ahead to consolidate its lead.

“I believe that Google’s advantage is widening with time and this is one example,” said Scott Devitt, an analyst with Stifel Nicolaus & Company. “Checkout could be a game changer, and the competitors are doing nothing of the sort.”

Unlike PayPal, a full-fledged payment system that can be used to transfer money between individuals and can draw funds directly from bank accounts, Checkout merely offers users an easy way to use their credit cards. Checkout users enter their credit card information, shipping and billing address into Google’s system. Then, they can pay with Checkout at participating stores without having to enter their personal information again and again.

Google says thousands of merchants are using the service. That is dwarfed by PayPal, which has millions of merchants and 123 million users around the world. In the most recent quarter, PayPal processed .1 billion in transactions, up 37 percent from a year earlier. While most of those were payments between eBay buyers and sellers, the number of PayPal transactions outside eBay rose 59 percent, to .3 billion.

Google has not released figures on the number of Checkout users. Still, there are signs that with the heavy promotions, the service is making significant inroads.

GSI Commerce, a company that runs about 60 online stores, including toysrus.com, levis.com and timberland.com, said that one in five holiday sales at its partners’ stores through the end of November were completed with payment systems other than credit cards, which include PayPal, a service called BillMeLater and Checkout. Of the three, “Google is the biggest by far,” said Michael Rubin, chief executive of GSI Commerce.

At StarbucksStore.com, Checkout transactions topped PayPal transactions by about a third, said Tracy Randall, president of Cooking.com, which operates StarbucksStore.com.

Checkout’s gains have not necessarily heralded a PayPal decline. A Goldman Sachs report this week said that based on conversations with various merchants, Checkout appeared to be making gains against traditional payment options and that PayPal’s share of online transactions was also growing.

Regardless, it is clear that the promotions have played an important role in Checkout’s quick adoption.

When Google introduced Checkout in June, it charged merchants 20 cents plus 2 percent of the purchase price for every transaction. (PayPal charges 1.9 percent to 2.9 percent plus 30 cents a transaction, while credit companies typically charge about 1.95 percent and 30 cents for every purchase.)

Yet, to lure merchants to its advertising system, Google offered them worth of free transaction processing for every in advertising they spent on Google.

But Google recently got more aggressive. On Nov. 8, it waived transaction fees for all merchants, regardless of whether or not they were Google advertisers, through the end of the year. Then, on Nov. 27, it began offering Checkout users off purchases at many e-commerce sites and, in some cases, off orders. And on Dec. 5, it announced that transaction processing would remain free to merchants through the end of 2007.

In other words, Google plans to lose money on every Checkout transaction for more than a year. Yet the company believes it will be worth it.