eBay Grooms Another Phenom

In the past year, PayPal has sown seeds to reach out to non-eBay merchants. Last May, it released an application programming interface to software developers, a move that helps e-tailers plug their online storefronts directly into PayPal technology. In December, Apple's(AAPL Quote) iTunes store began accepting PayPal payments.

However, PayPal's expansion raises delicate issues for eBay. For one, credit card companies won't be thrilled to welcome PayPal as a competitor, and neither will the banks that issue their cards. Jordan says PayPal has "a strong symbiotic relationship with credit card companies. We're addressing a part of market that historically they have not been able to strongly address" -- the millions of small merchandisers whom the credit card companies couldn't afford to underwrite.

But PayPal is already moving away from credit cards, which are more expensive for the company to handle than other means of payments, such as direct payments from bank accounts. Right now, fewer than 53% of PayPal U.S. payments are financed from consumers' credit cards, down from 56% in two years.

PayPal faces other obstacles such as fraud, a devil that has dogged eBay from the start. PayPal does a good job of using sophisticated models to minimize the risk it assumes in online transactions, but it only takes a couple of high-profile fraud cases to scare away potential users. Right now, phishers who try to net PayPal passwords are a looming threat.

Another reason why PayPal may want to keep a low profile as long as possible: competition. PayPal bought out or outlasted several startups with similar business plans, but the more it succeeds, the more new rivals will appear. Visa or MasterCard may find the best way to fight PayPal is to create their own versions. And there's talk that Google(GOOG Quote) may be contemplating a PayPal-like service. Asked about such plans at its analyst day last month, Google executive Larry Page answered with a noncommittal, "Who knows?"