PayPal Inc. is expanding its pilot with Home Depot Inc. and in the process, introducing its digital wallet to a new national audience.

The San Jose, Calif.-based company announced Feb. 28 in a blog post that by the end of next week, all of Home Depot’s roughly 2,200 stores will accept PayPal payments at their registers.

In January, a Home Depot spokesperson had said the retailer planned to expand the PayPal acceptance to all of its stores by earlier March. "It needs to reach scale very quickly. This won't catch on until that happens–until it's ubiquitous," Anuj Nayar, a PayPal spokesperson, said in a Jan. 18 interview (see story).

Home Depot is one of 20 charter retailers testing the technology, PayPal says. Office Depot is another, according to published reports.

“PayPal is living up to its promise to get far outside the digital space, and this is a really good example at the point of sale,” says Brian Riley, a senior research director in the bank cards practice at TowerGroup. “I think the juice behind this is PayPal’s ultimate goal, which is to be its own network.”

PayPal’s mobile wallet strategy doesn’t hinge on the introduction of chip-embedded smart phones that can be tapped at the point of sale. Unlike Google and Isis, both of which are banking on payments enabled by Near Field Communication devices, PayPal is already enabling real world payments by coupling different forms of authentication with smart phone applications. (NFC is a type of short-range wireless communication technology that transmits transaction data between phones to merchant terminals.)

The deal placed PayPal in terminals in 51 of the hardware stores, allowing customers to pay with a special card that routes transactions through PayPal’s network, or with a phone number and PIN.

In the past several months, the ecommerce arm of eBay Inc. has been aggressive, even talking to U.S. banks about possible partnerships that would have them signing up new PayPal customers through their banking websites.

The process ensures that a bank's credit and debit cards are linked to each freshly created PayPal account, rather than being funded by a store-bought MoneyPak from Green Dot Corp., or an account from a different issuer.

Still, banks have many options that might be better than partnering with PayPal, says Celent senior analyst Zilvinas Bareisis.

He says banks are better off working with the likes of Google Inc.’s Google Wallet and Isis, a joint venture between major mobile carriers, both of which compete with PayPal, says Bareisis.

“As PayPal has said all along, they are after changing the retailing experience, not just payments. But as PayPal continues to grow their merchant relationships and start taking over transactions at the physical point of sale, where does that leave the banks?” he says in an email to American Banker. “This is proof that it works and that PayPal is capable of signing up marquee merchants with their proposition.” PayPal is also trying to lure merchants with better pricing.

The payment networks already see the threat. For years, they have been decreeing PayPal both friend and enemy.

PayPal is one of the largest drivers of interchange revenue for the major card networks. It is also a competitor, taking away transaction data and stealing an increasing share of the marketplace from well entrenched traditional players.

There are, however, still obstacles to PayPal’s seemingly inevitable success.

In order for PayPal to reach consumers at the point of sale, it’s still going to have to give its users incentive to use them at the register.

“PayPal is going to really need to focus on consumer adoption, activation, usage and awareness over the next few months,” says payments consultant Philip J. Philliou. “They may want to concentrate on specific segments of Home Depot customers such as contractors and new home owners and provide additional incentives to them.”

Eventually, PayPal executives say the company will marry its point of sale payments with deals that will be marketed to users through their transaction histories and the location of their smart phones.

“The Home Depot integration is a great milestone for us, proof that we’re making our vision for the future of shopping a reality,” says Don Kingsborough, PayPal’s vice president of retail and prepaid products, in the blog post. “We’re going to continue re-imagining money to make it work better for our retail partners and their valued customers; stay tuned for more exciting innovations to come.”

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