PayPal is reportedly preparing to launch a smartphone attachment for processing credit card transactions similar to what Square and others are already offering.

PayPal is holding an event in San Francisco on Thursday, where it is speculated the company will introduce the new service. The move would follow recent steps by PayPal to build its presence in bricks-and-mortar stores via point-of-sale devices enabling shoppers to pay for purchases via their PayPal accounts by entering a mobile phone number and PIN.

“We don’t comment on rumors and speculation,” said Anuj Nayar, director of communications for PayPal, San Jose, CA.

“We do have an event in San Francisco on Thursday at 10am PDT where we will unveil what we believe will be the future of commerce for small businesses,” he said.

A trusted partner
If the rumors are correct, PayPal would join an increasingly crowded space, with Square, Intuit and VeriFone already offering similar smartphone attachments for small and mid-sized business.

Where PayPal might try a different approach is to offer a tool for large retailers, as many of these are already using its online checkout option.

“Square and their kind have shown that small retailers can increase transactions by offering consumers the ability to pay via credit card, in circumstances where there is not a dedicated landline and computer connection tied to a cash register,” said Wilson Kerr, Boston-based vice president of business development and sales for Unbound Commerce Inc. “This is the easier of the two elements of mobile payments.

“Far harder is offering a tool for consumers to use at large retailers that is compatible with the wide range of siloed point of sale checkout environments,” he said.

“PayPal is very well-positioned in this regard, as most large retailers already use PayPal as a proven and trusted online checkout option that is liked to demonstrated lift.”

The mobile payments space is growing quickly as new entries arrive looking to grab a piece of what is expected to be a growing industry over the next few years.

PayPal could be well-positioned to take advantage of this growth as consumers already know and trust the alternative payments brand, according to a recent report from Javelin Research & Strategy that analyzed consumer perceptions of mobile payments players based on trust, innovation and privacy. The report found that PayPal is second only to Visa when it comes to trusting these brands with their financial information.

Mobile challenge
The challenges that PayPal and others in this space face is growing competition and the fact that consumers have not yet shown that mobile payments are a must-have.

“PayPal faces challenges from carrier-forged mobile payment alliances like ISIS, from the credit card companies, and even from retailers,” Mr. Kerr said. “Walmart, for example, recently announced that they were creating a retailer alliance for the creation of a proprietary mobile wallet.

“Perhaps the biggest challenge facing anyone in the mobile payments space is the shift in consumer behavior required,” he said. “After all, how hard is it to take a card out and swipe it?

“The opportunity is huge. Juniper Research recently predicted that mobile payments will grow from $240 billion this year, to $670 billion in 2015, and there is fierce competition for the transactional percentage points skimmed off by whoever wins the race with a solution that is embraced by both consumers and retailers alike.”

PayPal expects to handle $7 billion in total mobile payment volume in 2012.

PayPal has been actively building a more well-rounded payments business over the past few months with a bigger focus on bricks-and-mortar retail locations than previously.

The company recently partnered with mobile payments application Tabbedout to let consumers pay their restaurant or bar tab in real-time (see story).

In February, PayPal piloted a program in Singapore’s subway stations to enable commuters to shop and pay for Valentine’s Day gifts by scanning QR codes on posters (see story).

PayPal’s POS devices are also being used in Office Depot and Home Depot stores (see story).

“PayPal is the clear third party payment platform leader online, so it makes a lot of sense that they are out to slay the credit card giants at point of sale,” Mr. Kerr said.

“Consumers trust them with their payment information and retailers know that adding PayPal as a checkout option increases conversions, online,” he said.

“The big question is whether this magic carries over to the brick and mortar point of sale.”

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York