Is Google Inc.'s online payment system, Checkout, getting ready to check out?

The Mountain View, Calif., company announced a significant increase last week in most of its credit card processing fees that has outraged merchants and prompted some observers to speculate that the service may be in trouble.

When the service was introduced in 2006, Google's rates undercut those of its main online rival PayPal Inc., and it waived some, or even all, of the fees for merchants that also advertised through its AdWords service. Google has said that attracting advertising was a key goal of Checkout.

But the new rates, which are to take effect May 5, are nearly identical to PayPal's, and the waiver for advertisers has been dropped.

Many merchants have already vowed to drop Checkout, and Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research in Pleasanton, Calif., speculated that this was the desired effect.

The pricing change could be an early move in "a gradual phaseout of the product," he said in an interview.

Separating Checkout from AdWords "is not positive news for Google Checkout," Cundiff said. "They're not saying, 'You can stand on your own, and you can do it as a stand-alone product.' It's more: 'We don't want to link you with AdWords anymore because it really wasn't working.' "

Google declined to make an executive available to discuss the changes. In a March 11 blog post announcing the new fee structure, Anita Barci, Google's marketing manager for Checkout, said her company is "committed to the continued growth and development of Checkout" and that merchants should "stay tuned for more announcements about product enhancements coming soon."

Google currently charges a base fee of 20 cents plus 2% of the transaction, though it waives the fee for AdWords clients for up to 10 times the amount merchants spend on the advertising service. Beginning May 5, however, Google will charge U.S. merchants selling domestically a 30-cent base fee plus a percentage that starts at 2.9% for users with monthly sales volume under $3,000. The percentage drops as volume goes up, bottoming out at 1.9% for volumes above $100,000. Google will charge an additional 1% for international sales.

eBay Inc.'s PayPal unit also charges a base fee of 30 cents, plus a percentage that starts at 2.9% for merchants with monthly volume of up to $3,000 but drops, nearly in lockstep with Google, to 1.9% for merchants with volume exceeding $100,000.

At an online forum Google provides for Checkout merchants, the response was almost unanimously hostile. From the start, the Checkout value proposition has been based on offering processing at lower prices than rivals such as PayPal, or as a free bonus bundled with other services.

Checkout users wrote that without this pricing edge there was little incentive to stay with Google, and they expressed shock that Google, which has developed a business model that depends to a large degree on offering free online services to users, had reversed course.

Ted Banucci, the president of The Last Cut, a San Jose video production company, wrote that Google's new rates make it less appealing than "even a regular credit card processing company like Elavon or Authorize.Net merchant services. With that fact, I don't see using Google Checkout as my credit card service as a benefit to my company."

A merchant with the user name 'mrobins' wrote Wednesday: "I plan on implementing PayPal on my site tonight. I'll keep Google Checkout's free processing as an option until May 5th. At midnight that night, I'll be removing it from my site, and I encourage other dissatisfied GC users to do the same."

By Friday morning, at least 80 comments in the same vein had appeared, and the anger has spilled over to a "Merchants Against Google Checkout Fee Hikes!" user group on the social networking service Facebook, where one merchant, Emma Coles of Wales, went so far as to call the rate hike "Google's suicide note" for Checkout.

In an interview, Banucci said that the opinions being expressed online about Google are more than just idle Internet rage.

"A lot of it is strong emotion, but I still think 50% of those commenters will switch" from Checkout, he said.

Price was Checkout's biggest selling point, he said, and without a competitive rate, there is little reason for merchants to stay with Google. "If you've used the tool, it feels like it's a beta-mode product. It feels like it's not polished at all," he said.

Cundiff speculated that the poor economy has cut into Google's advertising revenue; if merchants are not spending enough on AdWords, he said, Google cannot make up in ad revenue the discount it offers on processing.

The Checkout system has Google "paying transaction fees," Cundiff said. "They are the merchant of record, and they are paying credit card or debit card transaction fees."

Removing the connection to its advertising service, he said, is a sign that "they're not earning enough money to cover that spend … decoupling it from AdWords spend essentially means the [advertising] market's soft."

Jennifer Roth, a research director in the global payments practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said Google can take three possible steps now that it has changed its fees and two of them are not good for Checkout.

First, Google will have to "determine whether or not it's worth it to keep" the Checkout service. "If e-commerce numbers end up going on a downward trend again, Google will probably have to look at this business that they're in."

Second, if it does remain in the payments business, it could try to reduce expenses by eliminating some of the more costly services, such as accepting American Express Co. cards, which carry higher fees than the other major card brands. But "if that happens, then that would probably be the next indication that it's on a downward spiral," Roth said.

The third option would be to follow PayPal's example and let consumers fund transactions with stored-value or automated clearing house transactions, both of which are less costly than credit card acceptance, Roth said.

Nick Holland, a senior analyst at Aite Group LLC in Boston, said that "advertising will be hit in tough economic times" and the Checkout business model may no longer be viable. Google might "have to shift to something that's been tried and tested, by PayPal."

However, the decision to duplicate PayPal's fee structure almost exactly, while making no other immediate change in the product, "kind of baffles me," he said. "Where do they differentiate there? They don't have the volumes, so how are they differentiating their product? Clearly not on price now. So where is the reason for an online merchant to go with Google? … I don't think the Google brand is any more powerful than the PayPal brand."

PayPal did not return a call requesting comment for this story.

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