PayPal Inc. reportedly is planning to launch a mobile card reader that could help its nascent point-of-sale payment system reach small merchants.

PayPal has been promoting its digital payment system as an option at the point-of-sale. Its tests so far rely on large retailers that use equipment provided by major vendors such as Ingenico SA and VeriFone Systems Inc.

PayPal could displace card issuers if it can convince consumers to use cheaper funding methods in retail stores. With online payments, PayPal urges consumers to fund purchases with automated clearinghouse funds transfers instead of pricier credit card payments.

For PayPal to reach ubiquity at the point of sale, it would need an offering for the ultra-small merchants that rely on off-the-shelf products such as Square Inc.'s mobile reader. To serve that audience, PayPal is expected to unveil a card reader similar to Square's device, the tech blog GigaOm reports.

PayPal spokesperson Anuj Nayar says the company would not comment on speculation, but he added that an announcement of some kind would be coming this week.

"We are having a major event on Thursday where we are going to unveil what we consider the future of commerce for small businesses," he wrote in an email.

PayPal, a unit of eBay Inc., said last week that it is also planning a redesign of its website to showcase newer products.

"Physical-world payments are inevitable for PayPal, and this solution fits in nicely because the company's roots are in micromerchants, …which is also where Square found its traction," James Van Dyke, president and founder Javelin Strategy & Research in Pleasanton, Calif., said in an email.

"In physical-world card payments, the payments networks have achieved meteoric gains in profitability by upgrading many cardholder transactions to premium card offerings, which earn higher interchange for the bank yet cost the merchant more," Van Dyke says. "PayPal has scary potential to do just the opposite to the banking industry."

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