A Look Inside Google's Online Wallet

Investors wondering whether Google will ever make money in a business other than advertising may have their answer.

Safa Rashtchy, Piper Jaffray's Internet analyst, says that Google is moving into the potentially lucrative market of handling online payments, a move that would position it in competition with eBay, which runs PayPal. Rashtchy also suggests Google is planning to create a Craigslist-like listing site.

"Some industry insiders believe that Google is working on a PayPal-like payment system and has been testing it with some e-commerce players already," Rashtchy writes. "Our weekend checks indicate this assertion is likely to be accurate and that Google may launch this product in time for the holiday season."

Google hasn't commented on any plans for an online-payment service, even though investors queried executives on the subject as early as February. According to The Wall Street Journal, people attending Piper's Internet conference last Thursday said retailers have been contacted by Google about using its online payment system. The news site SearchEngineWatch said that Google filed in April to form the Google Payment Corp.

"Google will of course be facing significant hurdles to compete with the well-established PayPal, which has more than 72 million users," says Rashtchy, who notes that "when Google entered the paid listing business, it also had to catch up with a much more established Overture, which it eventually replaced as the No. 1 provider of paid search listings."

Rashtchy says that the launch of Google Wallet is likely to include 200,000 merchants, many of whom currently use eBay. "A Google payment system may not compete directly with PayPal, but it could limit PayPal's expansion beyond eBay," he says. "Google can subsidize the cost of transactions with targeted paid listings in the confirmation pages and email, and thus potentially offer a lower price to the merchants."