SAN FRANCISCO (Business 2.0) - PayPal is getting back to its mobile roots.

Back in 1999, when the company first launched as a tiny startup, it had designed software to beam money between handhelds and cell phones. It rapidly abandoned that plan when it found that buyers and sellers on eBay (Research) preferred to use a Web-based version of its payment service to settle auctions.

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Now, in a push to expand its business outside eBay, which bought PayPal in 2002, PayPal is aggressively hiring to staff up a new mobile-payments service. It already has some talent in-house – for example, Mathias Entenmann, who is one of Paypal's top executives and heads PayPal's international operations, is a German entrepreneur who previously ran Paybox Solutions, a European mobile-payments company.

Postings on job boards characterize the mobile-payments business unit as a "startup" within PayPal. Job postings currently include openings for a senior manager and product manager of the new mobile business.

Why the hiring push?

PayPal has long had ambitions to expand beyond e-commerce to process real-world transactions. Text-message payments could appeal to mom-and-pop shops that can't afford expensive merchant accounts needed to process credit cards. Fees for smaller merchants can run as high as 9 percent of a transaction, while PayPal's top out at 2.9 percent. On-the-go payments might also prove useful at yard sales, street fairs, and other informal marketplaces.

"PayPal needs to be out there" with a mobile service, says Dan Schatt, an analyst with Celent, a Boston-based research firm that specializes in analysis of the payments market. He points out that what he calls the "mobile economy" -- transactions carried out on cell phones -- grew to $2 billion in 2005.

"It's reasonable to think that PayPal will be offering mobile payment services through mobile devices and text messages to its customers," says Schatt. "It's a logical extension to what they do, and they're well-positioned to do it. They've got a secure and trusted payment system which will make it possible to pay on the go."

Schatt predicts PayPal could launch its mobile-payments service anywhere between now and June.

PayPal's biggest opportunity for mobile payments may lie abroad. While its e-mail payments work well in markets where PC penetration is high, it's not as useful in developing countries, where computers are not yet widely adopted. In India and China, for example, cell-phone usage far exceeds computer usage.

While PayPal has looked into mobile payments before without launching a product, the time may now be right for PayPal to get into the business. Competitive threats are looming, with Google's recent foray into the payments business and the launch of TextPayMe, a Redmond, Wash., firm started by a couple of ex-Microsoft (Research) employees.

TextPayMe lets consumers use text messages to pay each other instantly. TextPayMe's pitch is eerily similar to PayPal's seven-year-old marketing plan: Encourage consumers to pay each other electronically, charge nothing for the service, and offer a sign-up bonus for referring new customers -- a key to PayPal's fast signup of millions of users. (PayPal later began charging when payments were received.)

The process for sending a payment with TextPayMe is simple: Users text an amount and the recipient's cell-phone number to TextPayMe, which then sends a text message to the recipient. To collect the money, the recipient later visits TextPayMe's website to register bank-account details. It's not unlike how PayPal's e-mail payments work today.

TextPayMe is targeting more informal transactions than PayPal's e-commerce niche -- for example, instantly settling a restaurant bill among friends rather than splitting it among multiple credit cards. But it also suggests using its service to pay people for goods purchased on classifieds websites like Craigslist, a market that eBay sees as both a threat to its current auction business and an opportunity to expand its business. Today, many Craigslist transactions are settled in person by check or cash. (eBay owns 25 percent of Craigslist, and has started its own international classifieds website, Kijiji.)

"PayPal has done a great job online," says Phil Yuen, TextPayMe's 25-year-old CEO. "We feel there's more to be done in the real world, where the Internet is not involved."

Unfortunately for TextPayMe, PayPal appears to see the same opportunity.