But a month later, both PayPal and its parent company eBay say they have the depth of leadership necessary to execute its plan to enter the world of in-store payments.

In an interview, David Marcus, PayPal’s VP of mobile, made the case for why its mobile payments strategy will prevail in a market surrounded by incumbents like Visa, MasterCard and American Express, as well as new entrants like Google.

On the matter of Thompson’s departure, he downplayed the role of one executive.

“The strategy wasn’t one man’s thing,” he argued. “It was a shock for 24 to 48 hours, but we control our destiny, and it’s about execution now. So far, so good.”

In addition to speaking to Marcus and several other executives, AllThingsD got an exclusive look at the company’s newly constructed “Shopping Showcase,” which will be used to demonstrate to potential partners how it envisions next-generation payments will occur at the register.

From the ground floor of the company’s San Jose headquarters, it has built several realistic-looking facades, including a hardware store, a grocery store, a clothing store and cafe; users can walk from one experience to the next. I also tried out the experience of making a real purchase at Home Depot, where it is currently being piloted at many San Jose-area stores. (See the slideshow here.)

To be sure, Thompson’s departure was abrupt. He gave PayPal only 15 hours’ notice before the planned announcement that January morning by Yahoo.

But the company now maintains that its strategy for the next two years had long since been cemented, making it much easier to absorb the blow.

Over the next few years, PayPal will be trying to take its online relationship with 106 million consumers worldwide into the physical payments world, by extending its digital wallet services to cash registers at grocery stores, hardware stores and other retail locations.

It plans to do this through a series of different technologies, including PIN codes, credit cards and other services.

Meanwhile, other providers are trying to attack the market using near field communication, where users will tap their mobile phone at the register in order to pay.

Google, Visa, MasterCard and a consortium of wireless carriers, including AT&T, Verizon Wireless and T-Mobile, are all working on similar solutions, which will require retailers and consumers to upgrade their point-of-sale technology and mobile phones, respectively.

“Yes, NFC will be useful, and we’ll be there, but today we are trying to do more than replace swiping with tapping,” Marcus said.

He envisions shopping becoming a more fluid experience. Today, you pick out the items you want, place them in your shopping cart and then stand in line at the checkout.

But in the future, he asks, why couldn’t that change? What if you paid for items in the store’s aisles, or purchased them online before picking them up in the store?

NFC can be restrictive, because you have to be at a physical location in order to tap a terminal and pay.

The scenarios are possible, given how fast things are already changing.

Last year, PayPal exceeded its own expectations, reaching $4 billion in mobile payment volume. This year, it expects to increase that to $7 billion. One of those purchases last year was a $40,000 backhoe, which someone bought using PayPal on their phone.

“By the time NFC catches up, we will be in a world that will move away from the point-of-sales terminal,” he predicts.

As with PayPal’s traditional business, it expects to make money on fees, also called the interchange rate, which the retailer is responsible for paying. Its goal is not to provide a cheaper solution than the incumbents. Rather, it wants to provide other perks that will help retailers and provide incentive for the retailers to want to work with PayPal.

Such perks could include platforms that will allow the retailers to offer loyalty programs, shopping lists, credit options or coupons.

“If you add a payment method that adds 30 to 40 percent more volume [in business to the retailer], then the interchange doesn’t matter,” Marcus said.

Completed two weeks ago, the showcase is designed to woo major retailers and other potential partners that may be considering adopting PayPal’s mobile payments services.

The room includes several realistic-looking facades, including a hardware store, a cafe, a grocery store and a clothing retailer.

In each scenario, it demonstrates how it uses a mix of new technologies, offers and loyalty programs to make it faster and easier to and pay and stay engaged with the retailer.

What you won’t see is demonstrations of near field communications, which is a technology being used by many of its competitors. (To learn why it is not using NFC, read an interview with PayPal’s VP of Mobile David Marcus, coming later today.)

I also visited Home Depot in San Jose to buy something using my PayPal account. The service is now live at many of the Bay Area hardware stores.

Today, PayPal is one of the leading online payments companies, with 106 million users worldwide; but this year, the eBay-owned company is attempting to move offline, by partnering with retailers like Home Depot and other major chains to be announced later this year.

Here are the photos from the Shopping Shopping Showcase and Home Depot shopping visits:

View the slideshow

Gupta joined the company 18 months ago after Google acquired Jambool, a virtual goods payment platform where he was a founder and CEO. More recently, he’d been one of the leaders on the payments team, overseeing Google Wallet and reporting to Osama Bedier, Google’s VP of Payments.

“I can confirm that Vikas has left Google and we wish him all the best in his future endeavors,” a spokesman said.

Jambool’s product, Social Gold, was rolled into Google’s payment products and is being used for in-app purchases on both Android Market and Google+ Games.

According to Gupta’s LinkedIn page, he joined Google in August 2010 and held the title of head of consumer payments. Jambool reportedly was purchased for $55 million before any additional earn-outs. Prior to founding Jambool, Gupta worked at Amazon.

Gupta’s departure is the second management move made in the Google Wallet ranks over the past week.

A spokesperson declined to say if the division was undergoing a wider restructuring, but last week, I reported that Google’s VP of Commerce Stephanie Tilenius was moving into a more global position. And, as part of that, Bedier will be taking on a larger role within Google Wallet, though his title will not be changing.

The Wallet is Google’s mobile payments strategy that allows users to tap their phone at the register to pay using near field communication technology. The company has already successfully formed alliances with both banks and retailers, and is leveraging its vast install base of Android users.

Today, it is live with some merchants, although it does face some challenges.

Currently, it only works on one phone from Sprint, and both consumers and merchants will most likely have to upgrade their hardware for it to work. Additionally, some carriers, such as Verizon Wireless, have decided to disable Google Wallet on phones they are shipping. Other carriers, which are part of a mobile wallet joint venture called ISIS, are expected to follow suit, effectively limiting access for many U.S. consumers.

More than six months after hosting a flashy launch event, the business may be getting a lot harder than it originally looked.

In November and December, the number of online transactions increased by 37 percent, and overall sales jumped by 25 percent. But the average ticket size declined by 9 percent, according to Chase Paymentech, which analyzes information across the top 50 e-commerce retailers.

As it turns out, more consumers are turning to e-commerce for more of their everyday spending, rather than reserving online purchases for big-ticket items.

Here are Chase’s three reasons for the decline:

• More consumers are purchasing digital media, which has a lower price point than most physical goods — MP3s cost less than CDs, e-books cost less than paperbacks, and apps cost less than game cartridges.
• Prices for popular electronics, such as tablets, e-readers and TVs, are falling.
• More retailers are offering free shipping, which eliminates the incentive to fill carts to reach a free-shipping threshold.

EBay, which is the first major e-commerce provider to report Q4 results, confirmed it was also seeing the trend. The company’s payments division, PayPal, reported smaller transactions during the fourth quarter across the merchants it serves.

John Donahoe, eBay’s CEO, explained in an interview that the biggest driver of that trend was eBay’s acquisition of Zong, a mobile payments provider that powers the sale of digital goods. In addition, Donahoe said retailers, including eBay, heavily discounted products in order to drive more purchases this holiday.

Amazon, which is the leading e-commerce provider, also said that it is selling a lot of low-priced digital goods, ranging from e-books to MP3s.

Historically, the company has said that Christmas is the largest day of digital sales on Amazon.com, followed by Dec. 26. In 2010, from Christmas Eve through Dec. 30, Amazon customers purchased three times more digital content — including Kindle books, magazines, movies, TV shows, music and digital games — compared to the weekly average for the year.

Despite transactions declining overall, Chase identified two exceptions: Apparel and footwear rose 6 percent; toys rose 10 percent year over year.

(Amazon photo courtesy of thisisbossi)

The yellow-handled hammer, which the eBay CEO purchased at Home Depot using PayPal, signals that the company’s plans for entering the mobile payments business has entered the construction phase.

In an interview yesterday, Donahoe provided a few details about the company’s Home Depot trial and how it would expand from five to 51 stores across the country over the next week.

He also talked about his own experience of buying the tool earlier that morning. (Seen at right: Donahoe wielding his hammer.)

The company also announced fourth-quarter results yesterday, solidly beating both the company’s internal guidance and analyst expectations.

One of eBay’s big initiatives over the past year has been to find ways to work more closely with physical retailers by providing them with the technology they need to operate more efficiently online and offline. Over the past year, that has included buying 13 companies, for a total investment of $3.4 billion.

“We are right at the intersection of something that’s really cool,” Donahoe said. “This isn’t something that everyone sees, like social networking three years into it, when only the early people knew about it.”

What everyone is not seeing, he explains, is how retail and payments are two massive industries that are “at an inflection point where they will go through dramatic change.”

One major opportunity is payments being made at the cash register, and arguably many others see it, too, including Google, Visa, MasterCard and the wireless carriers, which are all working on their own solutions.

Interestingly, Donahoe was willing to put a price on it — and it’s huge.

If eBay is able to capture just 2 percent of the sales occurring at the point of sale, it will be able to double PayPal’s $70 billion business today. If they capture 4 percent, they’ll triple it.

Of course, that will take some time.

This year, eBay is focused on learning and testing out the technology in several trials; then, in 2013, it will begin to scale the business. In 2012, the company is not even factoring in a lift from point of sales in eBay’s revenue guidance.

The company’s big test will start later this week, when it expands its trial with Home Depot from five stores in the Bay Area to 51 stores in the Bay Area, Atlanta and Omaha.

Everything continues to be on track, despite the unexpected departure of PayPal President Scott Thompson. Thompson shocked Donahoe right after the New Year with the announcement that he was leaving to become CEO of Yahoo.

Donahoe declined to give an update on his plans to replace Thompson, saying that he was fine with serving the interim role in the meantime, and relying on the rest of the team PayPal has in place.

So far, Donahoe said, the mobile payments technology works flawlessly, based on his own experiences, but there’s still some additional scenarios they will have to consider.

Yesterday morning, he drove to a store in San Jose, where he consciously left his wallet and phone in the car.

He walked through the aisles to find a hammer and tape measure, and then went to check out, where the terminal gave him the option of checking out with PayPal. He entered his mobile phone number and PIN, and the transaction was completed, with the receipts sent to his phone and email.

“It was faster than swiping the card,” Donahoe said. “This is an advantage that PayPal has. No one else can do it with a mobile number and PIN. There was no fancy whiz-bang technology.”

Customers will also be given the option of paying with a PayPal credit card.

But not all the pieces are in place yet.

Coming soon: Users will be able to store their loyalty cards in their PayPal wallet, and will be able to receive personalized offers based on their shopping habits.

Also, it’s worth noting that while Donahoe checked out easily, there will be a learning curve for others. In advance of going to the store, users will have to associate a phone number and PIN with their account, and enable their account for in-store checkout.

Right now, there’s no contingency plans for if a person doesn’t have a PayPal account, or if it’s not set up. In fact, a very small percentage of the more than 100 million PayPal users have likely done that.

“That’s exactly why I say this is the year for trialing and learning,” Donahoe said, appropriately adjourning the interview with a bang of the hammer.

In a note sent to investors today, Gil Luria, an analyst at Wedbush Securities, was the first to disclose the relationship between the eBay-owned company and Home Depot.

“We speculate that Home Depot may be one of the first retailers to roll out PayPal at the point of sale,” Luria said.

In a statement, a PayPal spokesperson confirmed the partnership: “We frequently run trials with our retail partners. In this case, PayPal and The Home Depot are engaged in a limited pilot program for new POS technologies. The pilot is currently being run in five stores and involves a small number of PayPal employees.”

Home Depot is obviously a huge win for PayPal, which until now had only provided online payment solutions to customers.

The pilot, which went live in December, allows employees to pay for items at the register using a PayPal-issued credit card or by entering their mobile phone number into the point-of-sale device at the register. Neither solution uses near field communication, which can be a limiting factor for adoption.

More pilots are expected to take place early this year, but PayPal has been reluctant to name its partners, because it wants the retailers to be the ones to make the announcement when they are ready.

On Wednesday, Yahoo officially announced that it had hired PayPal President Scott Thompson as its new CEO, shocking executives at eBay, including CEO John Donahoe.

In an interview, Donahoe downplayed Thompson’s role in the company’s emerging mobile payments business by saying that the whole team participated heavily in the 2012 plan.

Wedbush’s Luria concurred: “We do not believe Scott Thompson was instrumental to the Mobile Payments vision. It is our impression that although ‘Paypal at the POS (point of sale)’ was led by PayPal management, the holistic mobile payments vision was driven at the eBay Inc. level.”

On Wednesday, eBay’s stock sank nearly 4 percent to close at $30.16. Today, it closed at $30.63.

Luria has an “outperform” rating on the eBay stock, and a 12-month price target of $48 a share.

In an interview this afternoon, eBay CEO John Donahoe confirmed that it was indeed a “shock” — as he wrote to staff in a memo — after returning from a long New Year’s weekend, to learn that the head of one of the online commerce giant’s key divisions, PayPal President Scott Thompson, was leaving to be CEO of Yahoo.

With only 15 hours’ notice before the planned announcement this morning by Yahoo — and even earlier, given that AllThingsD.com scooped the news last night — Donahoe had no time to inform the company, especially those working at PayPal.

Still, he was as cordial as he could be, given the circumstances.

“Scott is a great guy, and he did a great job at PayPal, and I am one of his biggest supporters,” said Donahoe — known at the company for his even-handed demeanor — despite being blindsided by the longtime eBay exec and also Yahoo. “I told him, ‘I hope you are very successful at Yahoo.’”

But the eBay leader, who noted that he prefers to avoid corporate drama, shrugged off the suggestion that there would be any animosity going forward with Yahoo.

“It’s not the timing that I would have liked. It would have been nice for him to be able to tell the team, but that’s neither here nor there,” Donahoe said. “It’s no big deal.”

He also said he’s not holding a grudge against Thompson.

“Scott wanted to be a CEO, and that’s great. He felt the opportunity wasn’t going to come along again. He had the best non-CEO job in the world, but he wanted to be a CEO, and wanted to go for it,” said Donahoe. “I get that, and there’s not that many CEO jobs coming up.”

Still, after the news broke, one senior Yahoo leader joked to AllThingsD that he was afraid to call Donahoe.

Indeed, now that Yahoo has nabbed Thompson from its crosstown Internet peer, Donahoe will have to move fast to fill the exec shoes now abruptly left empty.

That’s especially true since Thompson’s departure is occurring at a most inopportune time.

First the good news: The digital payments division, which has been the bright spot at eBay, is on target to have a record 2011 performance, and is set to roll out several significant initiatives this year.

But the big item on PayPal’s agenda is daunting, too: To challenge both incumbent payment providers, along with new entrants, such as Google, by creating a digital wallet that can be used for physical payments at retail.

Nonetheless, the most pressing order of business, obviously, is that Thompson will have to be replaced.

And that’s no small task. The seven-year PayPal veteran has a deep knowledge of the digital payments market, and has a track record of success. PayPal has continued on a breakneck pace over the last couple of years, with the division’s revenue now on track to surpass that of eBay.

In addition, Thompson — often described as likable with an easy-going personality — was the company’s most visible cheerleader on payments, eagerly talking to major retailers and convincing them to get on board with its next generation of services.

Now, while PayPal has a plan and a budget for 2012, there is currently no sole person to implement the vision.

Donahoe, who will head up PayPal in the interim, said he addressed the PayPal executive team in a meeting this morning, in an effort to keep the momentum going.

“I got together with the team this morning and we spent a couple of hours together. Rest assured that they are driving ahead collectively to implement the plan that they helped put together over the last year,” Donahoe said. “They have a clear set of 2012 priorities, and they are excited.”

He added: “There was a shock in the morning, but by noontime, it was full speed ahead.”

As an example, Donahoe said eBay had already reassigned five of the company’s top 15 strategic accounts that Thompson was responsible for. Donahoe will take a couple of those, as will eBay CFO Bob Swan, and Devin Wenig, president of eBay’s Marketplaces unit.

But make no mistake, there needs to be a Thompson replacement, and quickly.

PayPal does have a deep bench of executive talent, and any number of senior executives could step up to take the role, although it’s also likely that eBay will conduct an external search before coming to that conclusion.

“I won’t worry about what’s next until we’ve made it a couple weeks into the year and are hitting our milestones,” said Donahoe, who noted that the company’s vision was shared by the management team, and even though Thompson was the one communicating externally, “It was not a one-person plan whatsoever.”

Donahoe declined to elaborate any further on how eBay would conduct a search.

Thompson’s direct reports and key leaders include:

Ed Eger, SVP and GM of North America, core payments and emerging markets; John McCabe, SVP of worldwide operations and customer service; Patrick Dupuis, CFO; Gary Marino, SVP of credit products and risk, who joined through the acquisition of Bill Me Later; Mark Lavelle, VP of strategy and business development, also from Bill Me Later; Rupert Keeley, SVP of Asia Pacific; Sam Shrauger, VP of global product and experience; James Barrese, VP of product development; David Marcus, VP of mobile, who joined through the acquisition of Zong; and Ranjana Clark, SVP and chief customer and marketing officer.

And there is a fairly long list of companies for eBay to attempt to cherry-pick from.

One obvious company is Amazon, which has a competing payments division. If PayPal could legally pull it off, Matt Swann, VP and general manager of payments of Amazon, would be a prime candidate to run the company.

There are also other companies with payment talent — many of which are also situated near eBay in Silicon Valley — including Apple, Google, Facebook, VeriFone, Intuit and the traditional payments providers, such as Visa, MasterCard or American Express.

While analysts viewed Thompson’s departure as a negative, they were still largely optimistic about PayPal’s future.

Colin Sebastian of Baird Equity wrote in a note to investors that “the core PayPal consumer value proposition remains strong, in our view, and remains well positioned for long-term growth.”

Citi Analyst Mark Mahaney pointed out that Thompson’s departure comes on the heels of a number of PayPal executive departures, including Stephanie Tilenius and Osama Bedier, both of whom left for Google; and Lorrie Norrington, who left eBay for personal reasons.

Still, eBay’s stock dropped $1.18 a share, or nearly 4 percent, on the Thompson news, to close at $30.16.

It is interesting to note that eBay’s market cap hovers close to $40 billion, which is still twice Yahoo’s market valuation.

Thompson, who is currently in charge of one of eBay’s fastest-growing divisions, PayPal, will start at Yahoo next week.

This morning, we got our hands on the internal memo that eBay’s CEO John Donahoe sent out to the troops.

In the letter, which is posted below, he called the move a “shock” to him and the company. But Donahoe has known about Thompson’s talks with Yahoo for a while, but was apparently surprised that he had been hired and only found out yesterday, as he noted in the letter below.

Thus, Donahoe will fill Thompson’s position temporarily, until a transition plan is in place.

Thompson’s departure is notable because he was arguably leading one of the more important initiatives inside San Jose-based PayPal.

In a recent interview with me, Thompson said: “We are doing something so big that it will change the face of payments.”

Well, apparently, he’s found something larger to bite off.

Thompson’s departure will likely be seen as a significant blow to eBay.

At the time of our conversation, Thompson had just addressed 150 merchants at a PayPal event in Los Angeles that included big names like Home Depot and Sports Authority. He spent the week convincing them that PayPal was their next big partner for online and in-store payments.

Over the past year, eBay has been restructuring its core shopping experience online, while nurturing its rapidly growing digital payments business. The timing couldn’t be worse. Right as mobile payments is destined to take off, PayPal has a magical combination of assets, consisting of contacts with the retailers, the technology, and an impressive base of customers already using its services.

At the same time, a host of other challenges are going after the space, like Google, the wireless carriers and the traditional payment companies.

PayPal has also struggled with retaining top talent, losing two executives to Google, so Thompson’s departure won’t help its reputation in that department.

Donahoe pledges that the impact of Thompson leaving will be limited: “We will not miss a beat. And we will continue driving the incredible momentum that each of you has helped to create.”

This morning, eBay’s stock is trading 3.4 percent lower at $30.23 a share.

Here’s Donahoe’s full letter:

To all PayPalians,

As you may already have seen, Yahoo! announced this morning that Scott Thompson is joining the company as CEO, effective immediately. Scott informed me Tuesday afternoon, saying that despite his passion for PayPal, this was an opportunity he felt he had to take. I know I speak for everyone in wishing Scott the best.

I will serve in the interim role as President and will be meeting with the PayPal leadership team this morning to plan a seamless transition. And while I’m sure Scott’s decision is a shock to many of you, as it was to me, there is one thing I am certain of: PayPal has an enormous opportunity in front of it and we will not slow down. We will not miss a beat. And we will continue driving the incredible momentum that each of you has helped to create.

PayPal had an outstanding 2011 and a strong close to the fourth quarter. PayPal’s vision is clear. Our strategies are set and we have a strong, focused leadership team in place. And across PayPal, we have you — an incredibly talented team, committed to creating the future of money and changing how the world shops and pays.

Let’s do it, and take this special business to the next level in 2012 and beyond.

John

The odds are stacked against Dwolla.

It believes it has found a way to build a payment network that runs on cash and eliminates the costly fees associated with credit cards.

It is those fees, called interchange rates, that make other companies, like Visa and MasterCard, a ridiculous success.

To disrupt the system, the Des Moines, Iowa-based company is building a digital wallet that allows people to pay for an item at a store or in person (like the babysitter) using the Dwolla mobile application.

Today, it rolls out a new part of the system, which it hopes will financially support lower interchange rates for merchants.

The hitch is that instead of the entire burden being on the merchant, like it is now, consumers will be expected to pay for what they use. It would sort of be like a bank charging for checking (and we know how well that goes over).

Ben Milne, the founder of Dwolla, believes that if the costs of the system are transparent then people will understand why they have to pay. “There’s a cost to the network and we think everything should be apparent and upfront to everyone,” he says.

So far, there are two critical pieces of the operation.

The first one rolled out a few weeks ago and makes any transactions under $10 free to the merchant. Normally those transactions are cost prohibitive to merchants because they have to pay around 2.75 percent per transaction. On small purchases, that can be their profit margin.

The second part of the system rolls out today, and explains how Dwolla believes it can make money even when it doesn’t charge for small transactions.

The feature is called “Instant.”

It will allow Dwolla users who sign up for it to have access to cash immediately.

The company doesn’t mean the kind of money that folds, but rather allowing the free exchange of money between people and merchants without any fees — like cash. Think of it as a little bit like PayPal when there’s no fees.

Here’s how it works:

Users sign up for Dwolla and link it to a bank account.

They pay $3 a month to get access to cash immediately instead of having to transfer money from their account to Dwolla each time they want to use it, which can take two or three days. Users will have a credit line of up to $500. If they fail to pay off their balance at the end of the month, they will be charged $5. The subscription can be turned off at any time.

In the system, any transactions over $10 will cost 25 cents, which is paid by the merchant (or a person can volunteer to pay for it, which happens sometimes if it’s a donation).

The feature is even more important on the back end because it brings down a merchant’s cost of accepting credit. Instead of paying upwards of 2.75 percent per transaction, merchants will pay zero for purchases under $10.

Dwolla is working with TMG Financial Group in order to be able to extend the line of credit to its users.

The system may be a tougher sell to consumers, who are currently showered with free accounts and other incentives, like airline miles, for using credit cards.

Generally, Dwolla is part of the bigger trend of payments going digital. Google, Visa, MasterCard, cellphone carriers, American Express, PayPal and a host of other start-ups believe in the value of making money more accessible and losing the legacy form factor of a plastic card.

If consumers do buy into what Milne is trying to do, it still might be difficult to actually use.

The company is tiny. It has roughly 15 employees, 70,000 users and is live in up to 4,000 locations in the U.S.

Dwolla’s Ben Milne knows the odds and is still optimistic.

“Life is a hustle, and it’s not going to be easy to build these things. But we weren’t in rooms last year that we are in today, and the size of the financial institutions we are talking to right now are large companies.”

Verizon CEO Lowell McAdam said on Wednesday that he expects his wireless unit to be offering some form of shared data plans by sometime next year. Such plans would allow multiple devices to share a single pool of megabytes or gigabytes.

“I think in 2012 we’ll see it,” McAdam said. “We’ve been working on this for a couple of years, frankly.”

McAdam noted that the company expects some customers to be viewing content on four or even five devices.

“Customers don’t want — and neither do we, by the way — want an individual account for each one of those devices,” McAdam said. “It drives them crazy and it would raise our costs a lot. Getting to one bill and having account-level pricing is the right way to go.”

AT&T’s Ralph de la Vega said at our D9 conference in June that his company is also working on such a plan and expects it to be available before too long.

“We’re working on one,” he said at the time. “It will be soon. I can’t comment on a quarter (when it will launch) but it will be soon.”

Such plans have been widely anticipated and have popped up in a few places already. France Telecom, for example, is offering a couple of different plans in certain European markets.

McAdam sees a continued shift away from feature phones and into smartphones.

“I don’t see any reason why 70 percent (penetration) isn’t in our future,” McAdam said.

McAdam also defended the company’s practice of introducing high-end phones at prices higher than the $199 entry-level iPhone 4S price.

“They are selling very well,” he said of those $299 Android phones. “To me, the issue is ‘are we going to have the applications that justify it?’ And if we do, then I think we will be fine.”

One thing that is going to decline, McAdam acknowledged, is the revenue the company gets from things like text messaging, amid the rise of third-party voice- and data-messaging applications.

“I do expect SMS to be under attack,” McAdam said, noting that has already started to happen in some European countries.

“We haven’t seen as much of it on our side, frankly, but I think it is going to come,” McAdam said. “It’s kind of like long distance and the other stuff you saw fade away.”

The key, he said, is always having the next great thing, whether that is video or adding wireless to new kinds of devices.

On the mobile payments front, McAdam said things are reaching the prototyping stage with the Isis consortium that Verizon is a part of, with trials slated for next year.

“That should be significant deployment by the end of next year,” he said. “I think it becomes a real revenue stream for us in 2013.”

The investment marks MasterCard’s first in the mobile payments space, and follows similar moves by both Visa and American Express.

Neither company is releasing terms of the round, but mFoundry said MasterCard was the lead investor. Intel Capital, Fidelity Information Services and Motorola Mobility also participated. Previous investors include PayPal, Bank of America and Ignition Partners.

Consumers will most likely recognize mFoundry for developing the Starbucks mobile application, which displays a bar code that can be scanned at the register to make payments from a prepaid account.

MasterCard’s SVP of Mobile James Anderson said he was more interested in mFoundry’s relationships with 600 banks and credit unions.

For the past five years, the company has been focused on the mobile banking space, by developing applications for banks that enables users to check their balances and conduct other financial services from their phone. He said millions of customers at banks, such as Citi and Bank of America, use the applications three to four times a week on average.

Going forward, MasterCard wants to work with mFoundry to enable those applications to make payments at the register using MasterCard’s near field communication (NFC) technology called PayPass.

Near field technology allows a consumer to tap their phone at the register to pay for items. By integrating with these banking applications, the purchase could be deducted straight from a person’s bank account, and without the need to carry around a wallet.

MasterCard is also working with Google Wallet and ISIS, the wireless carrier-led initiative, but it views this partnership as a third approach. “Some consumers will see value in Google; others will want to use their telco provider, and then some will trust their bank,” Anderson said. “At some level those options will be competing, but we believe the choice is up to the customer.”

MFoundry’s CEO and founder Drew Sievers said the relationship is not exclusive, so his company will be free to work with Visa or others, but MasterCard will naturally have a head start since they will be the first ones integrated into the application. Deployments will occur as soon as the middle of next year.

MasterCard is not the only payments provider making investments in the mobile payments space.

Earlier this year, Visa made a large investment in Square, and American Express has opened up an office in San Francisco and created an intimidatingly large $100 million investment fund to make sure it doesn’t miss out on any opportunities.

Sievers said for companies in the mobile banking and payments space that are gaining traction, there’s not only venture capitalists eager to invest, but a ton of companies looking for strategic investments.

In fact, he said, “there’s fewer opportunities to invest in than there are companies willing to invest.”

In an interview, Doug Bergeron explained to AllThingsD the reasoning behind the spending spree, saying that the company is undertaking a major transformation that requires selling software and services — not just hardware.

Only two weeks ago, VeriFone agreed to acquire Point, a major retail payment provider in Europe, for $817 million (not including $230 million in debt). Two weeks before that, it picked up Global Bay, a smaller company that helps retailers connect their e-commerce assets to physical stores through the use of iPads. Terms of the deal were not disclosed.

Additionally, a year ago, it agreed to buy payment security provider Hypercom in an all-stock transaction valued at about $485 million, including debt.

The three acquisitions easily push the company’s investment above $1 billion. A bet of this kind represents a substantial risk, but Bergeron believes the decision to turn into a services company was a no-brainer, even calling it “obvious.”

The San Jose company, which has about 3,000 employees globally, has a history of growing through acquisitions stretching back to 2005, so maybe it can pull it off. In its fiscal 2012, the publicly-held company is projecting it will make a profit of up to $2.50 a share on revenues of up to $1.72 billion before the Point merger is taken into account.

Earlier this year, VeriFone appeared on the defensive, after Bergeron attacked San Francisco-based Square for not providing encryption in its mobile card readers. Since then, Square has promised to add another layer of protection, although the rollout is still pending.

VeriFone now seems to be on the offensive, having figured out what role it will inhabit as mobile payments come increasingly into play. And despite Bergeron’s earlier outcry about Square, he says the company will play “the role of Switzerland,” and will be neutral about which technology will win.

In particular, VeriFone wants to be the software developer that makes all the new innovations — including Google Wallet, PayPal, ISIS, the carrier-led initiative and others – work with a retailer’s existing systems. Since retailers have limited resources for technology, he believes this will be an important role.

Here are excerpts from my interview with Bergeron, who is not modest in calculating the opportunity in front of VeriFone.

What was the thought process behind the acquisitions?

Broadly speaking, VeriFone has a very impressive market share at the point of sale, and now worldwide with Point. We see the most signficant dynamic shift taking place is the new complexity that’s hitting the point of sale as a result of all the innovation that’s taking place.

It means transforming VeriFone from a focus on the best in products to both products and services. We will be delivering payments as a service. Retailers want to take advantage of Google Wallet and the iPad, and brick-and-mortar stores want to connect with online stores through multichannel integration. But these retailers don’t have 100 people on staff capable of integrating. They can either be left behind and not participate, or they can reach out to a partner to co-manage the increasing complexity at the point of sale.

Global Bay is providing software for tablets that basically allows for integration with inventory systems and e-commerce solutions and other types of services that the market is going to demand. At the end of the day, the retailers don’t want to lose a sale, and if they have someone ready to buy something, like women’s apparel or jewelry or apparel of any type or home repairs, where there’s a dialogue in the store with the customer, they want to upsell or make sure they leave with more than they would otherwise.

Otherwise, it’s hard to compete with Amazon, which has massive distribution centers across the country. But if small or large retailers can leverage their corporate distribution centers, then they have an advantage over Amazon. They have the touch factor with the person [in the store]. It’s a new age that has arrived for multichannel retail, where brick-and-mortar meets e-commerce. That’s what Global Bay is doing so well.

So you are evolving from a hardware company to a services company?

I’m going to edit your question.

We don’t produce hardware. It’s manufactured by third partners, and our product comes out of a $130 million R&D budget, of which $110 million is software.

For VeriFone, 90 to 95 percent of revenue has been product, but over the past two years, we’ve stepped up our services business with encryption and content at the point of sale.

In the fourth quarter, the quarter we are about to report on, we are projecting that services will be 22 percent of our business, and that’s on top of the total business growing dramatically. By the end of 2015, we think we can get it to 50 percent.

With the Point acquisition, which is all services — or close to it, at 88 percent — we’ll now be in the low-30s percentage.

I’m pretty sure, but for the most simple requirements, we’ll say [to the retailer], here’s the products, here’s all the boxes, and then check all the boxes for things you want, like Google Wallet, encryption; or do you want to support gift cards, or multichannel sales through the Global Bay capability?

You have a good perspective on the wide range of mobile payments that are rolling out. How many of these technologies will make it?

What I don’t know is what are the next types of innovations coming out of the Valley or other places.

Everything looks good on YouTube, or in a standalone trial, but if you have to roll it out to thousands of stores — and 50 lanes in each store — whatever new that’s out there has to coexist with the old stuff.

Who’s going to do that and the integration, and who’s going to manage the software updates? It certainly can’t be the two guys in IT, because they don’t have the resources.

How slowly will these rollouts occur? When you put it that way, it seems impossible for retailers to adopt it very quickly.

I think things move deliberately, not slowly.

That’s a bit of a wake-up call to those who come out of the online world and think they can put some code up in the cloud and it works. But when you talk to Costco, Macy’s or McDonald’s, which are all our accounts, they are innovative. They’ve rolled out pin debit or cash back, but it goes through a process of quality assurance, and they have labs where they test all this stuff, and then methodically move it out.

National retailers will have to get on board. They are the ones that move mindshare. They want the same experience in every store in every city in every state, and to mass deploy that, it takes a fair amount of planning.

How many new providers will make it?

There’s no question there will be a few, but it’s not limitless.

There’s a limit to the amount of change and chaos that the important retailers are willing to deal with at any given time. I’m describing a situation why VeriFone is so important. They [the retailers] love the meetings with PayPal and Google and ISIS, but all of this stuff has to coexist together.

In a lot of ways, we are playing the role of Switzerland. We are supportive and encouraging of all the innovation. We are the systems-agnostic guys that are operating on behalf of the retailers.

But all of these things would require software. The things that Google is trying to accomplish integrates with back-office systems at the SKU level. If it was just throwing hardware at the problem, it’s one thing, but it’s software.

You’ve talked about the importance of Global Bay, but now let’s talk a little more about the Point. Why was that acquisition important?

The data is out there. It’s a company that has grown fivefold over the last eight years, and is precisely located in the geographies in Europe that are A) healthy, and B) prone to be the first movers of mobile payments.

That’s where the Point lives and breathes. They have massive market share using VeriFone solutions, and more than half a million merchants in Northern Europe and the U.K. are using them to manage services that are largely around keeping EMV, which stands for Europay, MasterCard and Visa, up to date. EMV uses chip technology instead of swipe technology like we do here in the U.S.

They took out all the complexity of managing EMV and provided them [retailers] a monthly managed service. It’s precisely that framework and model that will allow us to turn the lights on for PayPal and Google Wallet and other services. The Point has been very much ahead of the pack, rolling out NFC capabilities before retailers have asked for it. This can be very exciting for Google and others, because it can enable a rapid deployment capability for any of them.

Are you going to make any more acquisitions? 

We are busy integrating right now. I don’t think you’ll see anything sizable for quite some time. For the most part, we are done with Hypercom, and waiting to do integration in January for the Point. For the most part, it will be independent. I think we have a lot of tools in the shed to help to find a new VeriFone.

The payments company will be using the name V.me to differentiate it from its more well-known services found at thousands of retail locations around the world.

Consumers will be able to fund the digital wallet using a variety of sources — a Visa, MasterCard or bank account.

It will be used to check out online using a user name and password, rather than having to key in the 16-digit number each time. The idea is similar to eBay’s PayPal, and to services by Amazon as well as e-wallet services being developed by American Express.

It will also be useful for checking out while shopping from a browser or application on a mobile phone or tablet. Later next year, Visa plans to roll out mobile payments to the register, where consumers will be able to tap and pay using near field technology.

The digital wallet is in a closed beta today but will be coming out in early 2012, after the holidays.

Jennifer Schulz, Visa’s head of product, strategy and innovation, said the wallet is intended to be open and funded through sources outside of Visa, and therefore “we wanted [the brand] to evoke Visa, and link to it, but without saying Visa.”

To accelerate the adoption of Visa’s payments services, including V.me, Schulz said Visa is unveiling a new developer program that will give anyone, including retailers, merchants and start-ups, access to its payments services.

The tools give mobile developers easier ways to accept payments on the phone, and help game developers that want to sell low-priced digital goods. There are also tools for big-box retailers.

American Express is also trying to woo developers, but rather than focusing on opening up its platform to developers, it has created a $100 million fund to invest in digital commerce opportunities.

Visa’s developer center brings its subsidiaries — including Authorize.Net, CyberSource, Fundamo and PlaySpan — together under one roof.

“We are announcing the Visa Developer Center, which is our platform for engaging developers globally with our Visa payment solutions,” Schulz said. “It provides us with a platform for engaging an important set of constituents.”

For one, the company’s iPad software will now work with existing hardware, including cash drawers and receipt printers.

That means, for instance, when the merchant taps “tender,” the physical cash drawer will pop open so change can be given.

It will also improve the way it tracks sales history and provides transactions. But it stops short of integrating with outside software providers, like Intuit’s QuickBooks, which many small business owners already use to run their accounts.

Other improvements center on consumer loyalty. The latest update, called Square 2.2, will enable merchants to designate how many visits it takes to become a loyal customer. If it’s 10 visits a month, for instance, merchants can give customers a discount as soon as they walk through the door and use the accompanying Square Card Case on the iPhone or Android.

So far, the company’s meat and potatoes have been with small merchants that were not accepting credit cards before — and likely hadn’t already sunk thousands of dollars into registers and other hardware.

With enhancements like these, it’s conceivable that it will be able to move upstream to larger retailers, who won’t have to start running their businesses differently in order to use Square’s methods. But it may still have a way to go before it enters the mainstream.

The fund will be managed from the New York company’s newly opened office in Palo Alto, Calif., where it will be led by Harshul Sanghi. Sanghi previously ran Motorola Mobility Ventures.

In an interview, American Express Enterprise Growth President Dan Schulman said the company is interested in start-ups in the digital commerce space, including those focused on loyalty and rewards programs, personalized offers, location-based services, security issues, analytics and online and mobile payments.

Schulman said the goal is to acquire a minority stake in the companies and form a strategic partnership with them, so that they can take advantage of American Express’s 94 million customers. Companies may also have access to its other assets, such as consumer data, as long as privacy is maintained.

American Express has already made a number of investments in the space. Those companies will not be part of the fund. Earlier this year, it invested in Payfone, a mobile payments technology company; it has also formed a joint partnership with Vente-Privee, a French-owned flash sales site.

Among the opportunities that American Express may have potentially missed out on is Square, a mobile payments company led by Twitter exec Jack Dorsey, which raised capital from investors including Visa.

“This is a demonstration of our very serious committment toward moving to a digital landscape,” Schulman said. “This is one of many initiatives that we are doing to get ready for the future and hopefully being a leader in digital payments.”

But in this game of one-upmanship, Square has thrown down the gauntlet by announcing this morning that it has made the payment process hands-free.

The San Francisco company, which was recently valued at $1 billion, said it has made it as easy to pay as saying your name.

A new version of its application, called Card Case, will leverage geo-fencing capabilities in Apple’s latest operating system update for the iPhone. The technology will identify when a person is within 100 meters of a favorite merchant.

Square’s Director of Products Megan Quinn explains that when a shopper is within range, a tab at that establishment will automatically open — without that person ever touching his or her iPhone. Once the user places an order and goes to pay, all they have to do is give their name.

The merchant will see on its iPad that a tab has been opened in that person’s name from inside the Square app.

Once a customer gets outside of the 100-meter range again, the tab will automatically close, whether a transaction was conducted or not. In theory, this means it would only be open for a few minutes if the shopper simply walked by a coffee shop and didn’t stop.

In addition to having to have an iPhone with the latest operating system, the consumer will also have to designate shopping establishments at which tabs could be automatically opened.

Since Square opened it up eight weeks ago, 20,000 merchants nationwide have joined the Card Case app’s directory.

In May, Square unveiled its mobile payments strategy for small retailers, including the iPhone and Android applications for consumers and the iPad software for merchants. Before that, it had focused primarily on allowing small businesses to accept credit cards using a swipe accessory plugged into a smartphone’s headphone jack.

Quinn said the most obvious benefits to the new features are speed and ease of use; however, there’s a more touchy-feely reason, too. “We’ve removed the artifacts from the experience, so it’s about the interaction between the merchant and the customers.”

In other words, it’s like walking into Cheers, where everybody knows your name.

[Photo credit: Wikipedia.]

I recently wrote about how Global Bay was assisting Pacific Sunwear in rolling out iPads to 600-plus stores over the next year.

At the time, Global Bay’s CEO Sandeep Bhanote called it “an Apple world in retail” and said that virtually no retailers were currently “looking at Android, or at the older generation of devices.”

Of course, VeriFone is the incumbent provider that has prospered greatly based on those older devices, but it’s now exploring new digital options.

Terms of the deal were not disclosed.

Bhanote has been appointed general manager of VeriFone’s Mobile Retail Systems business.

In a release, VeriFone said the acquisition is part of the company’s strategy to leverage mobile devices more going forward, including smartphones and tablets.

While this likely represents a fairly small acquisition, VeriFone has said it may acquire one company a year at roughly $500 million to $700 million apiece, along with several smaller transactions. In all, its purchases could add up to as much as $1 billion annually.

In a phone interview, Square’s Keith Rabois explained that the company would no longer hold back a business’s funds for up to a month if they processed more than $1,000 as a new customer.

Originally, he said when new businesses signed up they would have to provide additional verification in order to receive all of their sales by the next business day. Anything over $1,000 could be held for up to a month. That could easily happen for a plumber, or a small jewelry business that processed potentially large transactions.

The measure was originally in place to reduce fraud, but Rabois said, “Now that we’ve been commercially available for a year, we can now spot statistical anomalies.”

The San Francisco-based company, which is backed heavily by Visa and other investors, has been on a major growth spurt during its first year in business.

Rabois said it’s all about making the service really simple to use for individuals, small and even large businesses.

The company is now processing more than $2 billion a year on an annualized basis, and has fully authorized 800,000 merchants to use its payments network to date.

To put that in context, Rabois said Visa and MasterCard have authorized 8.2 million merchants. “In a year, we’ve been able to offer payments services to the equivalent of 10 percent of Visa and MasterCard’s network.”

What’s more, he said 70 percent of its users have never accepted credit cards before, so they are expanding the number of merchants accepting payments.

The launch comes on the heels of PayPal unveiling its competing digital wallet strategy last week in Rancho Palos Verdes, Calif.

PayPal believes it will reach a larger segment of the population faster, because it is not relying on as much technology.

Meanwhile, Google Wallet customers will be restricted to those with a Citi MasterCard (or prepaid card) and an Android-powered Nexus S from Sprint. Additionally, the merchant will have to have a MasterCard PayPass-enabled payment terminal.

PayPal anticipates having at least one major pilot by the end of the year, with a more major rollout slated for April; Google had previously pegged summer for a mobile payments launch.

In an interview, MasterCard’s head of mobile, Mung Ki Woo, defended the search giant’s approach to the market.

He said MasterCard already has 300,000 PayPass-enabled terminals worldwide, of which half are in the U.S. That number is growing, Woo said, but there is still a long way to go to upgrade all 30 million in existence.

Besides eBay-owned PayPal and Google, dozens of companies are rushing into the space, including American Express; Visa; the wireless carriers, through an intiative called ISIS; and start-ups, too, including Square.

But it’s not clear how quickly consumers will flock to change payment technologies, especially near field communication. which, according to some, will take at least three years to become widespread.

“Very much so, yes, we are in favor of NFC,” Woo said. “It’s going to take a little bit of time. Consumers will need to change handsets, but at the same time, they do it quite frequently now. And we also expect the number of locations equipped with PayPass will increase.”

At a recent MasterCard event in New York, the company demonstrated a number of scenarios for mobile payments. One of the examples that resonated best with people, Woo said, involved vending machines. ”They don’t accept credit cards, so they thought this was very cool,” he said.

Other areas of focus are everyday items, like gas, groceries and other necessities, including bus or train tickets, where the headache of standing in a line can be eliminated. Google already allows you to search for businesses in your ZIP code that accept the system. A quick search in Seattle shows a number of nearby fast-food restaurants and pharmacies that will take it.

Woo said that although there may be some lag as the infrastructure gets up to speed, he had two comments on PayPal’s approach to the market.

Last week, PayPal said one of its strategies was to allow people to enter their phone number and PIN at the terminal to pay, which would eliminate the need to carry a phone or a wallet.

Woo said, “It looks like a slow and clunky experience. Today, you can swipe your card; tomorrow, you will have to enter a phone number on the keypad. It seems to be slower than simply tapping your phone.”

Additionally, he wonders how much work the merchant will be required to do on the back end, so that users only have to enter their phone number at the terminal. “PayPass is compatable with existing back-end processes. There’s a real question as to whether, in trying to avoid any change on the front end, you are pushing everything to the back end.”

Another big difference between the two is that PayPal will be making money by charging for payments, whereas Google will be providing the service for free and making money from coupons that are offered to consumers, a la Groupon.

Woo would not say when Google Wallet was launching, though he allowed that “it’s going to be very soon.”

In addition, he said that after the launch, the ecosystem will expand quickly. “You’ll see a lot of merchants coming online, and a lot of announcements.”

Ironically, the event took place at Terranea, which was the same resort where Google demonstrated its Wallet and Offers platforms at the D Conference only three months ago.

Since then, not only has the space heated up, with all the major players announcing their plans, but so has the rivalry between the two Bay Area companies. PayPal filed a lawsuit against Google for stealing trade secrets and key employees, and now they will compete for the attention of merchants and consumers.

In an interview, PayPal’s president, Scott Thompson, explained how the online payments leader was different, and why he believes the space will take off “faster than you ever imagined.”

In demonstrations earlier in the day, PayPal showed me a number of different scenarios, including using a phone number and PIN code to replace swiping a credit card at the payment terminal. It is also integrating check-in capabilities to its mobile application and location-based services to identify nearby stores or restaurants. What it won’t be doing is relying on near-field communication technology or implementing an offer network, unlike Google’s approach to the market.

Thomson, in his thick Boston accent, was eager to share his side of the story, after hearing so many other competitors go before him. Here are some highlights from the interview:

What problem are you solving?

Thompson: An offline merchant today is seeing slow to no growth. It’s tough. E-commerce companies are still growing, and if you have both, you are seeing slow to no growth.

First, we know merchants are worried about consumers coming to you from all different ways — online, in-person, mobile, etc. Multichannel retailing is real for them.

Second, retailers are asking “Who is the customer?” If you visit the site, we know. There’s a wealth of information about them. In offline, they don’t even know you are in the store.

You are battling the competition with your hands behind your back. The question is “How do I close the loop? How do I know that Tricia’s here?” Our solution does close that loop.

What about NFC? In the four presentations I saw, it wasn’t used once.

Thompson: We are not embracing technology, we are solving the problem of what can I do today. It’s hard for me to speak [about NFC] until there are standards. You can’t ask retailers to implement three to five standards.

We can’t be so bold or arrogant to think that you’ll adopt to the standards we’ve created. If we said “Throw away your terminals and get a new one, or buy a new phone” — no one has that level of influence and pull to say “You’ll have to adopt to the standards we’ve created.” … We will work with the new and the old.

If we only built something that worked with this phone, this bank, and this network and NFC, you might address 50 people out of the 350 million people in the U.S. We hope that all 350 million people use what we are doing today.

You boldly predicted recently that by the end of 2015, digital money will be accepted everywhere in the U.S. Some people think you are nuts!

Thompson: This wave is going to happen faster than you think. If every consumer can pay with PayPal with a mobile phone number and a PIN, then I don’t ever have to reach and find this [Thompson pulls his money clip out of his pocket].

Why is that a possibility? There’s lots of reasons!

The value to the merchant is compelling, and the other thing that’s true is that there’s been a lot of compression of credit. A whole lot of people don’t have credit cards, and there’s a higher number of debit transactions. That’s an important change, if your debit card is compromised. The bad guys will get your money. I need more security than ever before. So, will it happen? Will it be fast?

It will be faster than you ever imagined. The one that wins will be the wallet that lives with you everywhere.

How important is this intiative to PayPal? It has spent hundreds of millions of dollars in acquisitions to get to this point.

Thompson: At analyst day, we said we would double our business by 2013, and those numbers don’t take into account any revenues from this point-of-sales initiative we are working on. This is going beyond to the next three-year commitment.

We’ll see revenues next year, but we are planting the seeds now [for 2014]. We said revenues would total $6 [billion] to $7 billion in 2013. To continue to grow at the same rate in 2014, you better do things now. We see an opportunity. We see technology changing, and now is the time to invest.

Just because you aren’t using NFC right away, doesn’t mean you won’t have a steep adoption curve. You’ll have to sign up offline merchants and get consumers on board.

Thompson: Our work is hard, and the relationships we’ll forge will be hard, too. You’ll see next year, when we formally announce our partners, that they are very big merchants.

[On the consumer side] If merchants see value, and integrate it and push it, consumers will use it. It will become a natural thing for you to use it in the grocery story or the pharmacy. You’ll be able to use it for everyday spending — that’s age-old logic. If the companies with the most foot traffic use it, it will be adopted.

So, it’s not for the mom-and-pop coffee shop?

Thompson: It’s where you are most frequently visiting.

Let’s talk about the competition. There’s American Express, Visa, MasterCard, Google and others, like Square, all coming up with different mobile payment strategies.

Thompson: I love it! I actually do!

It reinforces that the opportunity is big. I find it humorous that they find it a novelty. It wasn’t long ago — after all these years of them saying that no one needed a [digital] wallet — that they are saying that the wallet is now important and we better have one.

Besides, this is not unique to PayPal, but we play better the more sophisticated the competitor is. It’s remarkable how competitive our organization is.

Other payment providers are rolling out wallet technology for the chance to offer coupons or offers to the consumers — which could be a lucrative local advertising strategy. Will you be doing the same?

Thompson: In subsequent releases, merchants will be able to do things in the wallet, like offer coupons, but it is not our intention to compete in offers. We are doing payments.

I talked to a major retailer recently that said they’d find it a conflict if the payments provider offered discounts, rather than the retailer being the one to own the relationship with the consumer.

Thompson: That’s where we are different. The others are about coupons and advertising. We are about payments. That’s where 110 percent of our focus is. I believe we have this right. This will be a really big phenomenon in the multichannel world. We are in the business to help merchants grow their business. We are not trying to take the customer relationship away from them.

If we do our job right, all of our businesses will grow.

A sneak peek was offered to merchants today by the eBay-owned company, at a partner event in Rancho Palos Verdes, Calif., and separately to me in one-on-one briefings by executives.

PayPal had said it was going to launch pilot projects later this year, but this is the first time it is discussing how it will approach the digital market and how it will defend itself against incumbent payment providers like Visa, MasterCard and American Express, and new entrants like Google and San Francisco-based Square.

There were roughly 150 merchants present at the event, including Home Depot and Sports Authority.

In the resort’s ballroom overlooking the Pacific Ocean, PayPal set up several user scenarios that are intended to disrupt the way we pay for things online and in stores today, using a variety of technologies.

What stood out was that none of the scenarios required merchants to adopt new infrastructure or buy new terminals. Likewise, customers won’t be required to upgrade their phones or have certain types of bank accounts.

Instead, PayPal users (of which there are 100 million worldwide) will be able to pay by entering a phone number and a PIN code at the existing payment terminals, or by swiping a PayPal-issued card that’s not associated with a bank and does not have an account number printed on the front.

“We are doing something so big that it will change the face of payments,” said PayPal President Scott Thompson. “We can’t be so bold or arrogant to think that you’ll adopt to the standards we’ve created. If we said ‘Throw away your terminals and get a new one, or buy a new phone’ … no one has that level of influence and pull.”

“We will work with the new and the old,” he added. [More information from Thompson in a Q&A can be found here.]

A lot of criticism has surfaced recently that new mobile payment solutions relying on near-field communication will take three-plus years to adopt, because of the infrastructure required by merchants and consumers.

Others have pointed out that near field doesn’t exactly solve a problem for consumers, since swiping cards at retail is easy enough.

“No one is solving the friction in the entire payments process. We are not going to change consumer behavior,” admits Sam Shrauger, PayPal’s VP of global product and experience.

No photography was allowed at the event today, but PayPal walked me through the scenarios, demonstrating how the technology would work. A lot of it was repetitive, so here’s a brief overview:

Grocery store: In this senario, PayPal demonstrated how someone could use their phone number to pay. At the payment terminal, a user will be able to enter their phone number and a PIN code. The purchase will then be applied to the bank account or credit card associated with their PayPal account.

Coffee shop: In this scenario, PayPal demonstrated how it will allow users to continue using plastic cards if they wish. The card will be issued from PayPal and will not have a Visa or MasterCard logo on the front, and will contain no visible account information. As usual, the card will be swiped at the terminal and have an associated PIN.

Hardware store: In this scenario, a customer in a store sees a barbecue set that they’d like to buy. Using the phone, they scan the item’s barcode. PayPal would find that exact product that is in stock at that retailer, and the user would be able to check out in the store aisle and have the item shipped to his or her address, without ever going to the register.

All of PayPal’s scenarios had a few things in common. For example, users would be able to check in to a retailer’s location from the phone, like on Foursquare. That would enable a merchant to know that they are there, so they can interactively offer you coupons, or so you can place an order.

PayPal will also let users immediately apply for credit, so they can buy a new TV and pay in six easy installments!

The mobile application is also front and center in all of these use cases. Users will be able to find nearby retail locations and check in using a mobile application.

PayPal has stitched all of these technologies over the past year from several million-dollar acquisitions, including the acquisitions of BillMeLater, Milo, Where and Zong.

BillMeLater enables PayPal to extend users credit on the fly; Milo allows PayPal to look up the inventory within major stores; Where provides location-based offers; and Zong provides mobile payments using your phone number.

The approach is vast and a little hard to grasp without seeing it in person. Here’s a video provided by PayPal:

Critics suggest that using a credit card at the register is not much harder than using a phone enabled with near field communication. But if you are having a hard time understanding, maybe it’s because you are getting too old (sorry if I’m the one breaking it to you).

In an interview, David Messenger, American Express’s head of online and mobile, tells me they have identified a major pain point among teens and others who are still using cash and checks to conduct a majority of their transactions.

Dozens of companies are rushing into the space, including eBay-owned PayPal, American Express, Google, Visa, Mastercard and start-ups, too, like Square and others, but it’s not clear how quickly consumers will find reasons to use new payment technologies.

“The key thing that we’ve found resonates is the social aspects,” Messenger said. “This is about new growth opportunities and people who use cash and checks. … It’s the social experiences that don’t have great solutions. It’s awkward.”

Messenger also sat on panel yesterday at Mobile Future Forward in Seattle to discuss the topic with other executives from Google, Walmart, T-Mobile USA and OpenMarket.

The conversation got heated when a woman raised her hand to say she didn’t understand why she would ever adopt mobile payments: Seriously, how could a phone be easier than swiping a card?

Walmart’s SVP of online and mobile, Gibu Thomas, explained that the discount retail conglomerate would never pressure users to adopt it, while T-Mobile Chief Strategy Officer Peter Ewens defended the technology by saying that it improved security.

But Messenger said in an interview to me that the bigger opportunity is in the international markets, and for now it’s focused on teenagers in North America, who struggle in social settings.

He said the benefits are obvious when splitting a check at a restaurant, divvying up rent and utilities among five roommates every month, or being the person who fronts the money to buy tickets to a concert for a group of 10. Those transactions today are largely conducted with cash and checks.

Earlier this year, American Express unveiled a new business called Serve that competes with PayPal and other emerging payment platforms. It lets consumers make purchases at retail, withdraw cash from ATMs and make person-to-person payments from their computer or their phone.

Serve recently inked a deal with Ticketmaster to be integrated into the check-out process. People frequently abandon the purchase at the check-out in fear that their friends won’t repay them the hundreds of dollars owed for a concert or sports event.

Once Serve is integrated, he said, Ticketmaster will hold the tickets for a certain period of time and send an email to friends, alerting them to pay directly for the ticket. At that point, it’s simple: If they don’t pay, they won’t go.

American Express is also experimenting with using social networks by creating a Facebook application called “Pay Me Fool,” which uses humor as a way to make it more comfortable for someone to bug a friend to pay them back for beers last weekend.

For now, Serve mostly works as a prepaid card, but in the future, the platform could be used in conjunction with NFC or other emerging technologies. Messenger said they aren’t ruling anything out and are trying to be as open as possible.

The card can even be topped off with a Visa or Mastercard.

But right now, Messenger and the other participants on yesterday’s panel agreed on one thing: NFC is still about three years away from hitting the mainstream. It will take a while for users to get NFC-enabled phones and for retailers to have NFC-enabled payment terminals.

“NFC gets a disproportionate amount of attention,” said Messenger, who attributed the fixation to our “gadget-driven culture.”

A look into his wallet suggests how far the industry is from any major changes. Messenger’s thick leather wallet contained cash, a Connecticut driver’s license, 10 loyalty cards and five credit cards, including two from American Express, one from Serve and two from Mastercard.

However, I’ve found that asking mobile payment executives what is in their wallet is far from a window into the future.

Messenger said most importantly, the prepaid product addresses a whole new segment of the population that its corporate-heavy image would not normally attract. He hopes new types of commerce models will flip its business upside down.

For example, today, Amex markets heavily to acquire new customers and then keeps existing users happy by offering them rewards. He suggests that Serve will make it much easier to acquire new customers because of partnerships, such as the deal with Ticketmaster or another deal it has with Verizon Wireless. From there, he said, they will have to keep giving Serve users reasons to come back.

[image via if-youcantsleep.tumblr.com]