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Amazon Not Friendly to PayPal

The online retailer's payment service could shake up eBay and Internet commerce.

eBay's

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PayPal division thought it had dodged the bullet.

But the real shootout may just be getting started for the popular online payment service, which currently counts as eBay's biggest growth engine.

While PayPal has continued to thrive since the highly hyped and promoted

Google

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Checkout joined the field in 2006, the new payment service launched by

Amazon.com

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on Friday has what it takes to take a bite out of PayPal.

That has to concern eBay CEO Meg Whitman, who recently took the opportunity to highlight PayPal's trouncing of Checkout and who was banking on continued impressive growth to bolster the company's stock, which has traded essentially flat for eight months.

eBay investors, too, should pay close attention to Amazon's progress in this market.

For starters, the Amazon Flexible Payment Service, or FPS, is much more of a true competitor than Google Checkout ever was. While Checkout stores credit card information and makes it more convenient for users to make purchases online, it lacks the option of a direct link to a purchaser's bank account. Both PayPal and FPS, however, have that capability.

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The ability to transfer funds directly from bank accounts instead of through credit card billings, meanwhile, has been the key to PayPal's massive profitability. Fund transfers directly from bank accounts usually cost PayPal a small fraction of what credit card companies charge for processing an order.

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.

That shrewd approach to building momentum is a huge advantage for Amazon over Google. Amazon realized that users won't sign up unless many Web sites take payments from that service, and that many Web sites won't bother to set up a service that doesn't come with a large group of users.

"Any new entrant into the payment processing space faces a classic 'chicken and egg' problem," Amazon senior manager Jeff Barr wrote on the company's blog. "Fortunately, we have both ends of poultry life cycle covered."

While it's much preferred by users than is Google's Checkout, PayPal receives many complaints, as well. In a June interview with

Bloomberg

, CEO Meg Whitman trumpeted PayPal's triumph by claiming that an internal survey showed that only 14% of Checkout users were satisfied with the service.

A survey in January by JPMorgan found that 19% of Google Checkout users said their experiences with the service was good or better; 44% of PayPal users said the same about their experiences with PayPal.

In other words, more than half of PayPal users may stand ready to give Amazon a shot.