Online marketplace Etsy is putting more marketing muscle behind its PayPal alternative, Direct Checkout, as it waives processing fees this month and makes Direct Checkout a requirement for accepting its virtual gift cards, which launch next month.

Direct Checkout serves as an alternative to using PayPal for accepting card payments initiated through Etsy, an online marketplace for handmade crafts.

"Our objectives in launching Direct Checkout were to provide a seamless checkout experience for buyers, to decrease buyer drop-off when purchasing on both Etsy.com and through mobile channels, and to ensure a safe buying and selling experience," Camilla Velasquez, Etsy's payments team director, said in a blog post. "We've been pleased with the results and found that many Direct Checkout sellers report more sales, more international buyers, and higher customer satisfaction."

An Etsy spokesperson did not return an email requesting an interview to discuss the company's payments initiatives.

Velasquez joined Etsy in June 2011 after having worked five years at American Express Co., most recently as director of new product development for global payment options.

She also worked in business development for global prepaid during her time at American Express.

Etsy, which operates in 150 countries, has more than 17 million members and more than 800,000 active shops. Sales in 2011 reached $525.6 million, up 67.2% from $314.3 million the previous year, according to the company's website.

By comparison, PayPal's parent eBay Inc. has more than 100 million active marketplace users, according to its year-end financial report for 2011. Its gross merchandise volume (excluding vehicle sales) in the fourth quarter alone was $16.5 billion. EBay defines an active user as one that bought, listed or sold an item within the previous 12-month period.

“Merchants have to decide whether PayPal is a wolf in sheep’s clothing,” says Brian Riley, research director in the bank card practice at TowerGroup. “Should they continue to fuel PayPal’s growth," and thus fuel eBay's growth? "Or should they seek to do it on their own? And that’s what Etsy seems to be doing.”

Etsy launched Direct Checkout in February. It enables buyers to use a Visa, MasterCard, American Express or Discover cards to buy crafts from individual shops without being redirected from the Etsy website.

As of last week more than 100,000 shops were offering the service, depositing some $50 million in combined seller receipts, Velasquez wrote.

On average, buyers spend $2.50 more on items bought through Direct Checkout compared with other payment methods, and they spend $4.50 more per order when they can choose between Direct Checkout and PayPal, she said.

In August, new shops with Direct Checkout on average sold 19.3% more than did new shops not using the service. And among those, when the item added to the cart could be bought with Direct Checkout, shoppers were 16.3% more likely to complete the checkout process and actually buy. (All stats cover shops that made at least one sale in the measured period.)

In a separate blog post, Natalie Schwartz, an Etsy product manager, said site-wide gift cards have been a long-requested feature among both buyers and sellers on the Etsy site. Because Etsy is issuing and managing the gift cards, the process relies on a central checkout flow connecting shops to Etsy, and not to individual PayPal accounts, she said.

The continuous payment process "ensures that gift cardholders have all the legal protections required by each state and that sellers aren't personally liable," Schwartz wrote. "Gift cards will allow us to be more aggressive in our own marketing efforts by distributing gift cards to partners and creating promotional offers."

Any member will be able to purchase a gift card with a U.S. credit card, and the gift card information may be emailed directly to a friend or printed out to give in person.

"The gift card credit will be in the form of a code, which buyers will use toward purchases at any shop accepting Direct Checkout," Schwartz wrote.

Etsy also is finalizing some updates to its transaction policies and dispute-resolution tools. The changes should make expectations for both buyers and sellers clearer and the process for resolving disputes more intuitive, Velasquez wrote. The company will provide more detailed information before the Etsy gift card launch, she said.

Etsy next year plans to offer deposits and payments in additional currencies and to add more payment methods on top of credit cards, such as immediate bank funds transfers, eWallets and local debit cards.

These new payment options will start launching to an increasing number of countries in the first half of 2013, Velasquez wrote in her blog post.

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