Google Checkout's No PayPal Killer

How unsurprising: Bribe people heavily, and they'll use your service. That's the upshot of a NYT article on Google Checkout, the supposed PayPal killer. Google is subsidizing $10-off discounts for merchants who adopt Google Checkout, a payment mechanism which lets users register their credit or debit cards with Google.

But Google (GOOG) doesn't really threaten eBay's (EBAY) PayPal unit. Here's why.

Google says it will continue to provide Checkout for free through the end of 2007. That's a big savings for merchants, since credit-card processing can cost about 3% of a sale. But in the long term, Google will have to charge - and it will never be as profitable as PayPal.

Why? PayPal breaks even, at best, on credit-card transactions. But it makes a ton of money on sales where it transfers money directly from bank or PayPal accounts. PayPal charges merchants the same fee to process those transactions but pays much, much less to banks to execute them. (If you thought PayPal lived off the interest on money sitting in PayPal accounts, wake up - that's not how it makes a serious profit.)

Google, on the other hand, only deals with debit or credit cards, which are expensive to process. Ultimately, as with every other unprofitable Google venture, Checkout is subsidized by sales of advertising.

And that's why it's worth it for Google to offer Checkout for free: If the Checkout logo increases click-through rates, then Google and advertisers both benefit, whether or not customers end up using Checkout. In fact, given the subsidy, Google's better off if shoppers decide not to use Checkout after they click on an ad.

eBay itself, not PayPal, faces the bigger threat from Checkout. E-commerce ads with the Checkout logo could prove more cost-effective for merchants than selling on eBay, allowing Google to draw some merchants away. Added to an existing trend of shoppers buying less on eBay, that could make a bad situation worse.

Ultimately, of course, PayPal's health depends on eBay, right? Maybe not: PayPal grows less dependent on eBay every quarter. As the Times noted:

In the most recent quarter, PayPal processed $9.1 billion in transactions, up 37 percent from a year earlier. While most of those were payments between eBay buyers and sellers, the number of PayPal transactions outside eBay rose 59 percent, to $3.3 billion.

So let's stop talking about Checkout as a PayPal killer - and start talking about PayPal as an eBay savior.

http://blogs.business2.com/beta/2006/12/google_checkout.html