Google's service is designed to serve as an electronic wallet that will enable consumers to buy products and services from a bazaar of merchants without repeatedly entering the same personal and financial information at each store.
Google tested the payment service, which is called "Checkout," for nearly a year, spurring widespread speculation among Internet analysts and investors.
As Google attempts to boost its already lofty profits and become an even more prominent player in e-commerce, the company risks alienating one of its biggest advertisers - online auctioneer eBay Inc., which runs the Internet's leading payment service, PayPal.
Although Google doesn't bill its service as a PayPal competitor, there is no question it poses a long-term threat to eBay, said Internet market analyst Greg Sterling.
"Any time Google does something like this, it has the potential of turning into a big deal," Sterling said.
Why get involved with yet another third party while shopping online?
"For many people, shopping online is still too cumbersome, which is why the majority of transactions that are started are actually never completed," says CBS News Technology Analyst Larry Magid. "You have to have to fill out long forms with your name, address, and credit card numbers, which is time-consuming and, in some cases, a security risk. This new Google service could cut out some of those steps."
The new service, says Magid, would make Google a payment broker between consumers and merchants, with customers giving Google their credit card number and having Google process their online purchases, making it possible for sellers to collect their money without also receiving their customers' credit card information.
That's a timesaver and a security plus, says Magid, who notes another bonus for small businesses: the payment system ties in with Google's advertising program for small businesses. Merchants who buy ads get a discount on fees Google charges for processing transactions.
At least two merchants, Starbucks Corp. and Buy.com, who have signed up for Google's new service also accept PayPal, which eBay bought for $1.3 billion in 2002.
EBay spokeswoman Amanda Pires declined to comment on Google's entrance into online payments, but the company signaled its concerns about the search engine's expansion last month when it formed an alliance with Yahoo Inc. that will make PayPal the preferred payment provider on the Internet's most trafficked Web site.
Users with a Google account simply enter a credit card account number along with a few other details and the company will deliver the payments to any of the participating merchants, which must advertise on the search engine to participate.
Currently, Google is only accepting credit cards for purchases but remains open to other payment vehicles such as electronic fund transfers from individual bank accounts, said Salar Kamangar, vice president of product management for the company.
Merchants that accept Google Checkout will be identified by a green shopping cart symbol that will appear next to their ads.
Google will discount its payment processing fees based on how much merchants spend on advertising through the search engine - a strategy designed to generate more revenue for the company.
"It's a really smart move by Google, a wonderful way to close the loop with its advertisers," said Forrester Research analyst Charlene Li.
Still, Li believes many major merchants with well-recognized brand names will be reluctant to use the Google service because they prefer collecting the checkout information themselves so they have the data for future marketing efforts.
Merchants won't have to pay processing fees on purchases totaling 10 times their advertising volume with Google. That means an advertiser spending $20,000 per month at Google would not pay any processing fees on purchases totaling $200,000.
After the spending threshold is exceeded, Google will charge merchants a fee equal to 2 percent of the purchase amount, plus 20 cents (16 cents) per transaction.
PayPal's processing fees range between 1.9 percent and 2.9 percent of the purchase amount plus 30 cents per transaction. The model that has proven successful so far. PayPal handled $27.5 billion (euro21.9 billion) in online transactions last year, generating $1 billion (euro800 million) in revenue for the company. It currently has about 105 million users worldwide.
Except for PayPal, few other online payment services have gained much traction so far.
Google is betting its service will catch on by simplifying the online checkout process for consumers, encouraging people to shop more on the Web and use its search engine even more frequently. Citing industry surveys, Google estimates that 37 percent of all e-commerce begins with a request entered into an Internet search engine.
"We think Google Checkout will complete the process so people can search, find and buy things quickly," Kamangar said.