Smartphones have forced Pay-Pal Inc. to change course on mobile payments.

A year ago, the payments company said the U.S. market was years away from embracing mobile phones for transactions, largely because the applications that were most common then did not deliver what people wanted.

But now the eBay Inc. unit is pushing hard to deliver its services through high-end phones, which it says can support easy-to-use payments applications and can provide a variety of desired features.

Analysts said the smartphone payments market is evolving rapidly and PayPal's entry could pose a threat to credit cards, the dominant tool for online purchases.

PayPal already offers a version of its person-to-person payments software that runs on Apple Inc.'s iPhone, and is a payment option for people buying from Apple's application store.

And perhaps the biggest coup in this strategy is PayPal's deal to be the sole payment service provider for the application store that Research in Motion Ltd. is developing for its BlackBerry handheld devices. When Rim introduces its app store later this year, all purchases, including those customers make with credit cards, will go through PayPal's system, according to Jack Stephenson, PayPal's senior vice president of strategy and new ventures.

Advanced handsets such as the iPhone, BlackBerrys, and comparable devices are changing the way people use their phones, Mr. Stephenson said. He said the key for PayPal is to think of them not as phones but as portable computers that have a variety of communication capabilities — including voice, text message, e-mail, and Internet browsing — and play to PayPal's historical strength as a payment service for online transactions.

"The reason that we focus on the smartphones … is that we are seeing people interacting with those devices much, much more actively. Playing games, ringtones, various applications, stuff like that," Mr. Stephenson said. "People are actually doing this multiple times a day, and if we could be capturing some of those payment transactions, that would make PayPal much more relevant."

Eric Duprat, PayPal's general manager for mobile, said smartphones "are going to be the beachhead" of mobile payments "because this is all about consumer convenience, and only the smartphone provides the quality of user interface which you need for having a good, convenient interaction. The mass phones do not provide a good enough interface."

PayPal's smartphone strategy is a big shift from its earlier approach, PayPal Mobile, which was introduced in 2006 and worked through text messages. That widely available format, supported by almost every phone, can be cumbersome for payments, Mr. Stephenson said, and does not deliver a broad range of easy-to-use features.

"It wasn't meaty enough for consumers to use, and we didn't get a lot of adoption," he said. "It was a product that, for most consumers, was not going to be simple and easy."

PayPal's president, Scott Thompson, said in March of last year that the San Jose company's efforts to make phones function as payments tools was "early," and that the company believed it would have to wait, possibly for several years, for the U.S. handset market to catch up before its mobile strategy could take off.

As it turns out, PayPal only needed to wait until the July 2008 launch of the iPhone app store, which has become a huge success. Users can download an enormous variety of applications to their phones; many are free, many others cost only a few dollars, and the payments are processed through Apple's iTunes service. According to Apple, consumers have downloaded 500 million application through its app store.

In addition to Rim's upcoming app store, there will be others, including the Android Market that Google Inc. is testing for its recently released Android mobile phone operating system.

"We're just thrilled with what the iPhone has done," Mr. Stephenson said. "It's been a huge breakthrough. We're also thrilled to hear about Google Android and some of these other players" that have promised similar mobile application stores. (Representatives of Google and Palm Inc., which has also said it is developing an app store for its upcoming Pre device, declined to discuss how they expect to handle payments.)

Mr. Stephenson said the rapid evolution of smartphones, and the growing popularity of the app stores that serve them, could be a big opportunity for PayPal.

"As you see more of these app stores starting to open up, we do believe the PayPal wallet is a very convenient way for people to be able to pay for things," he said.

Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said he expects "the explosion and success of the app store for iPhone" to "be replicated for BlackBerry users."

Aligning with PayPal is a good move for Rim, Mr. Cundiff said, because the payments company offers more than 65 million active users. Linking this tech-savvy population with mobile payments could eventually serve as a catalyst for the growth of mobile e-commerce by getting consumers "to the point where they recognize the value and utilize these stores to make content purchases," he said.

There were 263 million U.S. mobile phone subscribers as of June 2008, according to the trade group CTIA — The Wireless Association. But key product launches since then, such as Apple's iPhone 3G and Rim's BlackBerry Storm, have accelerated smartphone adoption.

Nick Holland, a senior analyst at Aite Group LLC of Boston, said the mobile content market has evolved significantly since the days when carriers had much more influence over the software running on their handsets, purchases were dominated by ringtones, and the payments were generally routed to customers' bills. "Mobile content sales are shifting way outside the control of the mobile operators, and there's a huge latent opportunity for anyone like PayPal," he said.

Full-fledged mobile app stores "just didn't exist a couple of years ago," Mr. Holland said. "What you're getting now is much more like an e-commerce model," which is a great fit for PayPal, he said, because its history with eBay has made it "highly trusted in the online space."

Mr. Stephenson said the focus on smartphones marks a return to PayPal's beginnings. Long before the payments company sold itself to eBay, its first product was designed to transmit money between mobile wallets stored on Palm organizers.

PayPal is also making other efforts to expand its mobile capabilities. For example, last year it began allowing users to receive one-time passwords as text messages, and it rolled out a student account that parents can use to send money to their children.

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry