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

The start-up, called Mobeam, got the endorsement of such a large company because of a major glitch in the couponing system: Most scanners in grocery stores cannot read a bar code displayed on the screen of a cellphone.

“Couponing has been one of the tried and tested tools to incentivize consumers to try our products,” said Jeff Weedman, P&G’s VP of global business development. “Ads around the world have moved digital, but there was a hole in the system. You can deliver coupons digitally, but frankly our customers weren’t happy about it. It doesn’t scan at most grocery scanners, and it slowed the system down because the checkout person would have to plug in the numbers manually.”

In October, Cupertino, Calif.-based Mobeam raised $4.9 million in capital to solve this problem, developing technology that coverts bar code data into a beam of light that can be read by most checkout-counter scanners.

A host of applications are already available for download on many smartphones — Starbucks has been one of the shining examples. Its application, which allows customers to pay at the register, has enabled 26 million mobile payment transactions this year alone.

But few people realize that Starbucks had to replace all of its scanners in its stores for the app to work.

Today, couponing is $3.7 billion segment of the consumer packaged goods market in North America, with more than 300 billion coupons distributed every year.

Increasingly, they are going digital, too.

Hundreds of millions of dollars in investments have been made this year in the distribution of coupons online and via mobile. Most recently, WhaleShark raised $150 million. Others include CouponCabin.com, which raised $54 million; and Coupons.com, which secured $230 million in two megarounds.

The prospect of finding coupons online and saving them to the phone, which can then be scanned at the register, is appealing. Currently, the main two options are to clip coupons from the newspaper, or to print coupons that were found online.

But don’t expect to be able to start using Mobeam’s technology tomorrow.

Mobeam will have to convince phone manufacturers to integrate its technology into their hardware. It says it is expecting phones to start shipping as soon as next year.

(Photo credit: sdc2027)

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.

And there are more significant deployments underway.

Lowe’s announced last week that it was rolling out 42,000 handheld devices at stores in the U.S. and Canada. That closely follows announcements by Home Depot, Nordstrom and Urban Outfitters.

While some of the retailers are a little shy about saying which devices are being deployed, for the most part they are using Apple products — an iPhone, an iPad or an iPod touch. And while the devices may eventually be used to accept payments, many of them are starting off as tools for salespeople to look up answers or to check on product availability.

It’s not just large retailers, either — small stores are also jumping on the mobile bandwagon.

I happened to see an iPad being used in a small winery in eastern Washington state. The device, which was mounted on a mechanical arm, was still in the process of being set up, as evidenced by the nearby iPhone, calculator, traditional credit card point-of-sale machine and cash register at the nearby counter. But a complete changeover was in the works.

And the list keeps growing, according to South Plainfield, New Jersey-based Global Bay, a company that develops mobile software for the retail environment.

It is announcing today that it is helping Pacific Sunwear, a retailer known for surfer-style apparel, to roll out iPads in 300 stores, with plans for 500 to 600 more by next year.

Global Bay CEO Sandeep Bhanote said he’s been in the business of mobile retail solutions for a long time, but it is “the Apple line of products that has reinvigorated the market and is bringing it [mobile] to the mass market … Everyone is looking at the Apple technology line. No one is looking at Android, or at the older generation of devices … It’s an Apple world in retail, although that could change next year.”

A variety of companies, including Google, Square and Verifone, are also racing to get a piece of the action.

Bhanote said Global Bay did its first iPad deployment last year, in November.

It was at a mall store called Things Remembered, and the iPad served as a self-service kiosk where customers could select the right engraving for a particular item, such as a jewelry box.

“Why not use the iPad to streamline the experience?” Bhanote asked.

Even in these early stages, there’s evidence that handheld devices may evolve, moving from tools that automate annoying or painful processes to becoming sales-generating machines.

“The next phase is introducing a commerce component,” he added.

Bhanote declined to say how many iPads it has helped to deploy in the past year, but said that retailers are already starting to see results. One retailer reported that it experienced a 12 percent increase in average order transaction when a customer was serviced with an Apple device in the store.

PacSun associates will carry iPads in the store to help customers place online orders when products are out of stock. Using an application built by Global Bay, store associates will be able to find a shirt or pair of shorts and then order it from the iPad, accept the customer’s payment and ensure it is shipped to the customer’s home.

Bhanote said for an apparel chain of that size, being able to close five more transactions a day per store means a lot of money.

However, there are still some logistics to be worked out. If a mobile device replaces the register, where do you store the cash? What happens if a salesperson drops and breaks that $500 device? Worse yet — what if a customer drops it?

Bhanote said PacSun is putting security tags on its iPads, so if someone walks out of the store with one, an alarm will sound. He said other customers have used rubberized cases for protection; in the case of the winery, there was that mechanical arm.

But the winery’s second iPad wasn’t as lucky. The device was being used by associates, who walked around the store with it, and it was accidentally knocked off the table by a customer. It was a very expensive lesson for a small company — especially when the customer only bought one bottle of wine.

Photo Credit: Beekman1802.com.

Jack Dorsey, Square’s CEO, said today during a live stream of the press conference at TechCrunch’s Disrupt event: “Only six percent of commerce has moved online. This is as easy as buying a song on iTunes.”

Dorsey said that there’s a lot of talk about mobile payments, but other systems are addressing only one piece of the ecosystem. Square’s solution addresses the whole picture.

The company first started with the original Square dongle, which allows consumers to use their smartphone or iPad to accept credit card payments once they’ve plugged a Square dongle into the headphone jack. Today, it announced the two other critical components for it to work: the register and the consumer-facing app.

First is the “register,” which is actually an iPad that comes with Google-like analytics, allowing merchants to monitor what’s going on, such as what percentage of coffee drinkers also bought biscotti. Second is the consumer-facing component, which Square is calling the Square Card case, which is an iPhone application.

“There’s a lot of talk about mobile payments today. We think we have an easy solution. It doesn’t just go after the parts, it goes after the whole,” Dorsey said.

This vision was laid out extensively to All Things D months ago in an interview with Dorsey, who also co-founded Twitter.

The system will initially launch with 50 merchants across the U.S. in several cities, including St. Louis, Los Angeles, Washington, D.C., and San Francisco.

So far, Square has gained a tremendous amount of traction in a short time. It has shipped 500,000 readers, and so far this month has processed $1 billion in gross payment volume.

Now it believes it can leverage that volume to see mass adoption by consumers.

“We want to take away the clutter and the paper, and get rid of the loyalty cards and get rid of the receipts,” Dorsey said.

It starts with the user’s card case, which must be set up in advance with a user’s credit card information. From the card case, the user will be able to see the menu of the restaurant, cafe or spa they are visiting. Users can click to order. When they go up to the register to pay, the consumer doesn’t hand over anything but their name.

“It’s really, really magical. It’s something that makes the experience awesome,” Dorsey said.

The simplicity of it might be the hardest part to sell.

Consumers and merchants will have to believe that using Apple products can be as safe and secure as big enterprise-grade systems that everyone is accustomed to seeing.

Square will also have to go up against a ton of other providers coming down the pike, including solutions from PayPal and payment giants such as Visa, MasterCard and American Express.

The San Francisco-based start-up recently received an investment from Visa.

But it didn’t say how it would overcome technology barriers, such as finding a way for a smartphone to connect to the register without requiring a consumer to get a new phone with a near-field communication chip, or without making the retailer buy fancy new hardware.

Today, it announced an acquisition that may be one way it could solve this costly dilemma.

On the PayPal blog today, the company announced that PayPal has acquired Fig Card, which has developed a way for merchants to accept mobile payments by using a low-cost USB device that plugs into the cash register or point-of-sale terminal. Customers will have to install the Fig app on their smartphones.

“We loved their approach to point-of-sale, particularly because it was driven by the same vision that we have at PayPal–in the future, transactions can be as smart as a computer and not as dumb as paper. We won’t need our physical wallets. We’ll be able to pay any way we want, from any device, anywhere in the world with both flexibility and privacy,” said Peter Chu, PayPal Mobile’s senior director.

Fig Card was founded in early 2010 by Hasty Granbery and Max Metral, who will be joining the PayPal team. On the company’s Web site, it admits that the obvious challenge for the company is its small size, but that it was moving forward with trials among a handful of merchants in Boston’s south end.

Prior to founding Fig, Metral was co-founder and CTO of Firefly, which was bought by Microsoft. At Microsoft, he developed Microsoft Passport, one of the first single-sign-on systems. He then co-founded PeoplePC, where he met Granbery. PeoplePC was purchased by Earthlink.

If you spend any time with eBay at all, it’s clear that a lot of its emphasis is on PayPal. On Wednesday, it noted the division’s contribution to revenue growth in the first quarter and said in the first three months of the year, PayPal added one million accounts for the sixth quarter in a row. It now expects to achieve 100 million active accounts by the end of next quarter.

Additionally, PayPal was just shy of hitting its first billion-dollar quarter, and now represents 39 percent of the company’s overall revenues. To support its goals further, eBay recently acquired WHERE, a location-based mobile services and ad network.

While PayPal is one of the longest-standing online payment providers, it faces steep competition in the digital payment space from both incumbent providers and new entrants.

For instance, the Fig technology sounds similar to what Square is trying to accomplish by passing out dongles that can enable virtually any smartphone to accept payments. Square announced this week that it received an investment by Visa. Other giants like Google are getting into the space, and additionally, Facebook is becoming a big player in the space with the roll-out of Credits, a system used today to pay for virtual goods, digital items, and, increasingly, physical goods, like daily deals.