Once just a trading ground for newly released video game consoles, rare Beanie Babies, and other questionable investments, eBay (Nasdaq: EBAY ) has grown into a full-fledged e-commerce hub. Lately, competition from services such as Amazon.com's (Nasdaq: AMZN ) marketplace has hurt eBay's core business. But its plans to bring PayPal, its online payment service, into the real world make the company one to watch.
Cashing in online
PayPal helped drive eBay's growth even before it announced plans to enter the world of physical retail. In 2010, about 40% of eBay's revenue came from PayPal. At the moment, the service is accepted at 60 out of the top 100 online retailers, and it processes 25% of domestic online sales. Thanks to its online success in the U.S. and abroad, PayPal's total payment volumes have grown by 24% annually for the past three years.
The service should also continue to grow online as PayPal finds new opportunities. For example, Activision-Blizzard (Nasdaq: ATVI ) announced that it has partnered with PayPal to allow Diablo III players to sell their in-game treasures to each other through the game's auction house for real money. If the plan proves successful, I would expect to see PayPal enter similar agreements with other game makers.
Checking out in the real world
However, PayPal's most exciting opportunities await offline. Last week, the company previewed its plans to move into mobile payments. Unlike Google (Nasdaq: GOOG ) Wallet -- which just launched on Sprint (NYSE: S ) -- PayPal's system doesn't rely on near field communications. Users can either enter a phone number and a pin at existing payment terminals, or swipe a card linked up to their PayPal account. Neither option will require users to upgrade their phones, nor force retailers to add to their infrastructure.
The service will also offer a suite of tools to help make shopping easier. For example a user can scan a barcode for a big-ticket item in the store, pay for the item, then have it shipped to them without ever visiting the register. If the item the user wants is out of stock, he or she can search other stores' inventory to see whether it's available nearby. PayPal will also allow customers to apply for instant credit, which could be useful or dangerous, depending on your level of impulse control.
So why isn't eBay a screaming buy?
I see a lot of potential for PayPal's mobile payment service -- but I also foresee challenges. My fellow Fool Evan Niu has already raised questions about the security of using a phone number and a four-digit pin for verification. I can't imagine that Evan is the only person with these concerns, which could slow adoption of the service.
Even if we set security questions aside for now, the mobile payments space will get crowded very quickly. In addition to PayPal and Google Wallet, Verizon (NYSE: VZ ) , AT&T (NYSE: T ) and T-Mobile have launched a joint venture to develop their own service, Isis. Visa (NYSE: V ) has hedged its bet by throwing its support behind Google and Isis, while also developing its own digital wallet. Because each service is still in the very early stages, trying to pick a winner at present would be little more than a crapshoot.
If you'd like to keep an eye on eBay as it moves into mobile payments, click here to add it to your watchlist.