Amazon Not Friendly to PayPal

But PayPal tends to charge merchants the higher rates credit card companies charge, despite the form of payment, and pockets the difference.

Amazon will attempt to undercut PayPal by charging merchants based on the type of transaction, rather than as if each transaction was most expensive type. This move threatens the sweet, profitable setup PayPal has created for itself.

"Smart companies attack competing profit pools with vigor and we believe some of Amazon's interests are in direct attack of PayPal's profit pool, as has been some of Google's intent with Checkout," Stifel Nicolaus analyst Scott Devitt wrote in a research note on Tuesday. Stifel Nicolaus makes a market in Amazon shares.

Pressure from Amazon's new service may force eBay to offer merchants more generous offers to keep them. But that would come at the price of previously expected profit.

What's more, Amazon has a much better strategy then Google, which attempted to crudely buy its way into the payments business by waiving merchant costs for a limited time and offering discounts to users for signing up.

Rather than paying users to sign up, Amazon will instead add the payment feature to the accounts of its 69 million active customers. Along with better economics than PayPal, that kind of instant mass awareness is another incentive for merchants to get on board.

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