eBay's (Nasdaq: EBAY) PayPal is stepping out of the digital world and into the realm of physical brick-and-mortar retail.

Earlier this week, the company unveiled its ambitious multifaceted plans to take on Google's (Nasdaq: GOOG) payment-processing advances as well as startup Square. PayPal's approach will differ in a handful of ways and offer numerous methods to process payments to merchants. The company will be combining the services of a gaggle of recent acquisitions: Zong, BillMeLater, Milo, and Where.

Users will be able to pay using a telephone number and PIN thanks to Zong, apply for credit on the go through BillMeLater, and browse real-time inventory with Milo, while Where sends out location-based coupons.

In addition to the phone number and PIN combo, users can opt for a swipe-able PayPal-issued card that lacks any account information and isn't tied to any specific bank account. The card would also be used in conjunction with a PIN, similar to a debit card. A smartphone-enabled approach would allow for scanning a product barcode to check the merchant's inventory in real time and even have the product shipped directly to your address and eliminating the need to visit the register.

What it's not
In contrast to Google Wallet, the system won't rely on near-field communications, or NFC, chips, which have been drawing a lot of attention recently. Too bad for NFC chip maker and official Fool recommendation NXP Semiconductors (Nasdaq: NXPI), but good for merchants since it means they can use their existing point-of-sale terminals instead of embarking on the costly and time-consuming process of building up NFC infrastructure. The roughly three-year ramp-up period in NFC infrastructure is a possible reason the technology may not be included in Apple's (Nasdaq: AAPL) forthcoming iPhone 5.

Security, schmecurity
My initial gut reaction to the phone number and PIN concept is skepticism over its security. PayPal's ease of use by traditionally linking to your email address has been a double-edged sword in my experience because it has made the company a bona fide fraud magnet. In its efforts to add various layers of much-needed security, the company sometimes hinders legitimate users.

For example, like most netizens, I have numerous email addresses -- some of which are defunct -- in addition to having multiple credit cards shared with my wife. PayPal's policy is to allow a credit card to be linked to only one email account. I once tried to use one of said credit cards through PayPal only to be blocked because the card was linked to another email address. It was nearly impossible to get any sort of information from the company since, for security reasons, the company refused to even tell me which of my own email addresses it was linked to -- and it ended up being linked to an inactive address. In the end, I had already processed the payment through a different medium.

Using a phone number is even easier, leading to much greater security concerns. This is also how I check into my local 24-Hour Fitness gym: I punch in my phone number, followed by a PIN, and then scan my fingerprint. Having only a phone number and PIN is less secure than my gym.

A nondescript PayPal-issued card sounds appealing. Since it won't include any account-sensitive information printed on it -- which, in retrospect, makes credit cards seem rather silly for proudly displaying such information -- the card presumably would be easily replaceable and remove the hassle of changing compromised account numbers when lost or stolen.

A whole new world
The announcement represents the first major instance that PayPal has emerged out of its digital comfort zone and into the touchy-feely offline domain currently ruled by Visa (NYSE: V), MasterCard (NYSE: MA), and American Express (NYSE: AXP). It offers the prospect of faster adoption since it will function with existing infrastructure and devices -- most smartphones today currently don't include NFC chips.

It's an exciting prospect that has the potential to drastically broaden PayPal's horizons and drive revenue growth if merchants support the initiative. The primary challenge that the company will face is how to balance security concerns with ease of use. Investors expressed their confidence in the plan by sending parent eBay's shares up more than 6% yesterday.

What do you think? Will PayPal make physical retail easier? Share your thoughts in the comments box below.