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What has been the single most influential financial innovation on the Web? Online banking? Internet credit cards? Online stock trading? Nope. It's eBay. I feel a little strange saying this because I've never bought anything on eBay. I'm afraid that once I start putting in those bids, I'll never be able to stop. It can be acutely addictive -- I know one person with a garage full of Wonder Woman memorabilia.

But it's not eBay's online auction model that I think is so significant, nor the company's profitability. It's that, by virtue of eBay's 10 million or so registered users, it has been able to jumpstart something that nobody else could get off the ground: true digital payment.

Before eBay, the most practical way for people to buy things on the Web was with a credit card. But credit cards have a somewhat deserved reputation for being less than secure. The Gartner Group estimates that credit card fraud on the Web is 12 times that of the offline world. I believe it. The only credit card number ever stolen from me was for a Yahoo-branded Visa that I had never received and that was used at the Gateway PC online store. Imagine! Me spending money at a PC store!

Clumsy Credit Cards

Credit card numbers are vulnerable to theft or abuse. But in the online auction world, that's just the beginning of their drawbacks. Uncle Jack probably doesn't want to go the trouble of getting set up to accept Visa payments just so he can unload his collection of vintage duck decoys. And even sellers who do enough auction business to justify accepting credit cards must wince at the extra 2.5 percent that banks typically charge for credit card transactions. Furthermore, buyers hate having to buy and mail a money order or cashier's check, and then wait for the seller to receive it. And no seller wants to deal with personal checks, period.

The answer to all of these problems: person-to-person electronic payment services. You sign up for a service, give them your credit card or bank account information, and can then pay anyone simply by sending them an e-mail message.

Easy Money

Such a simple way of exchanging money has been on many wish lists for years, but the problem has always been getting a critical mass of users to adopt one system. Now, thanks to eBay, at least one person-to-person payment system already has 4 million users, with another 10,000 or so signing up every day; it's 's PayPal, which is used in an estimated one-fourth of all eBay auctions. That doesn't mean that the other three-fourths are all using credit cards and money orders, though. eBay has its own payment system, BillPoint (which is backed by Wells Fargo), and other competitors such as eMoneyMail,, and Paydirect (from eBay auction competitor Yahoo) are popping up like bids on a Three's Company lunch box.

PayPal owes its success both to its simplicity and to a savvy marketing campaign that rewards people for signing up and for getting others to sign up. A friend signed me up for PayPal, and I still have the $10 sign-up bonus burning a hole in my virtual pocket. Perhaps most important: PayPal is free for consumers (for now, at least), and it's cheaper for business users than credit cards. Free and cheaper are powerful incentives to adopt any new technology. PayPal's success has also enabled it to add an element that's missing from some of its competitors: a guarantee of up to $100,000 against fraudulent transactions. The FDIC doesn't want to know about online payment accounts, so PayPal has taken out its own insurance with Traveler's Property Casualty.

Beyond eBay

It's great that people now have an inexpensive and convenient way to scoop up knickknacks, but PayPal's real significance is that it's useful outside the auction context. You could send a PayPal payment to a friend by using a PDA or cell phone. Need to split the check at dinner but don't have cash on hand? Just e-mail it.

The financial world has noticed the potential of person-to-person electronic payment services. Most significantly, Intuit has announced an agreement to include some kind of PayPal functionality in future versions of its products. Given how complicated the current state-of-the-art for online banking and bill paying is, this has to be a positive development. Whether this functionality will make it into Intuit's poor-stepchild Mac version of Quicken is an open question.

In the meantime, I'm scouring eBay, searching for a really cool auction that can be won with $10. Guess I'd better make some room in the garage.

JAMES BRADBURY is the former editor of MacUser and former online editor of Macworld .

You can sign up for PayPal at .
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