Is Amazon.com About to Eat PayPal's Lunch?

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is slightly higher this afternoon as investors continue to fuel the now 62-month-old bull market.

Online retail behemoth Amazon.com (NASDAQ: AMZN  ) made headlines this morning, announcing a move that will bring Amazon's powerful customer base to start-ups and other companies around the globe.

How? By opening up Amazon's payment processing capabilities for subscription payments, a feature long dominated by eBay's (NASDAQ: EBAY  ) PayPal division.

The power of "1-Click"
The move makes perfect sense for Amazon, with a customer base of more than 240 million online shoppers and an existing network of third-party sellers that generate approximately 40% of Amazon's sales.

The Amazon payment interface is one of the most frictionless checkout processes in the world -- if not the most frictionless. Buyers on Amazon can purchase a good or a monthly subscription for a service or product with the single click of a button -- no credit card input, no shipping or billing address. Click once and you're done. It's almost too easy.

This is made possible because Amazon stores both credit card and shipping information on its cloud database.

The new service announced today does not make full use of Amazon's existing database, which is actually a positive for the start-ups and merchants considering using the service. Amazon will handle only the dollar amount of each transaction, without necessarily receiving any further details about the product or customer.

This gives merchants a level of protection against Amazon moving into a competitor role and stealing customers. At the same time, though, these start-ups and small businesses can leverage the trust and brand recognition associated with the Amazon name.

Analysts expect there is more to come
Many analysts see the move as a logical precursor to a more bold move into mobile payments. 

Later this month Amazon is expected to unveil its first smartphone product to compliment its existing line of e-readers and streaming TV players. With the introduction of the smartphone, a move into payments fits with Amazon's long-term strategy of increasing the company's presence in the consumer's life.

Amazon wants to be the one-stop shop for goods and entertainment, so why shouldn't they also be the middle man in your payment processing?

Traditionally, this role has been the sweet spot for PayPal, which I delved into in my report on the digital-payment industry earlier this month. But Amazon's competitive advantage over PayPal is twofold. First, there's Amazon's unparalleled brand recognition in the online retail space. Second, and more critically, Amazon has an incredibly smooth checkout experience in "1-Click," which is a patent protected feature.

Throw in a highly integrated mobile payments app on the new Amazon smartphone, and PayPal may find itself reeling from the power of Amazon's 240 million existing customers.

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