July 27, 2006, 12:00 AM

Google Checkout may give PayPal a run for its money

In late June Google Inc. launched its long-anticipated payment service, Google Checkout. The big question within the industry is whether the new service poses a significant challenge to eBay Inc.`s PayPal, the dominant non-card online payment tool.

To date nearly 100 retailers have added Google Checkout to their sites. Like PayPal, Checkout enables shoppers to make purchases at participating e-retailers. Unlike PayPal, Checkout is not a payment alternative to credit and debit cards. Rather, it’s a “card gateway” that uses consumers’ existing cards and streamlines the payment process-and can substantially lower the costs of card payment processing for merchants, especially for those using Google AdWords, a component of the Checkout offering.

To begin using Google Checkout consumers create an account at Google.com or a participating e-retailer. They enter a username, password and all basic transaction information such as contact details, credit or debit card data, and shipping preferences. Thereafter, when checking out at any store offering the service, shoppers can select the Google Checkout option and complete a transaction simply by entering their username and password. The system automatically fills in all necessary data fields. This differs from PayPal, where shoppers must enter basic transaction information for purchases at each site.

Hear ye, hear ye

Shoppers can locate retailers accepting Checkout by looking for the service’s icon on Google AdWords advertisements or at an e-retailer’s site. Google is promoting the service to consumers via a dedicated page at Google.com that provides links to merchants using Checkout and through mentions during the checkout process of e-retailers. No other promotional plans have been announced.

For merchants, the standard rate for using Google Checkout is 2% of a sale plus 20 cents per transaction. Merchants who accept Checkout and also use the company’s Adwords search advertising program can process $10 in sales at no charge for every $1 they spend on AdWords. This is significant because that makes use of Google Checkout considerably less expensive-potentially even free-than what merchants must pay for card and PayPal transactions, experts say.

Some industry observers, expecting Checkout to be a direct competitor with PayPal, now view the service more as a method to drive search traffic and revenue for Google, contends Charlene Li, a Forrester Research analyst. This is in part because it’s set up to streamline the checkout process in a way that increases conversion, she says. “It’s the equivalent of having one-click checkout on not just one but many sites.”

Others, however, believe Checkout poses a more significant threat to PayPal, citing as evidence the decision by eBay-which operates PayPal-to ban its sellers from accepting the new service.

Is it, or is it not?

Even though Google Checkout functions as a card gateway instead of a direct payment option like PayPal, eBay seems to be regarding it as a direct competitor since the auctioneer has not yet permitted its use while permitting the use of other card gateways, asserts Scot Wingo, CEO of ChannelAdvisor Corp.

However, eBay reports that it has placed Checkout on its list of payment services not accepted only because it has no proven track record, a requirement for eBay acceptance. Further, eBay does not view Google Checkout as a direct competitor. “PayPal is a full-service payment offering that can be used for online purchases, person-to-person payments and, in some cases, for offline purchases,” a PayPal spokeswoman says. “They’re very different services.”

Like others, Citigroup analysts view Google Checkout as a threat. While PayPal offers more funding options, a stronger trust and safety reputation, and broader merchant acceptance, Checkout has leapfrogged PayPal via increased checkout speed for consumers and much lower transaction fees for merchants, the analysts said in a July 5 report.

However, while the prospect of low or no-cost processing of card transactions and lower advertising costs may persuade retailers to try Checkout, conversion rates will be the decisive factor, contends John Bresee, president of Backcountry.com. “Conversion is king,” he says. “If it converts, it’s a good idea. If not, it’s a bad one.”

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