Google is making plans to offer an electronic-payment service that could help the Internet-search company diversify its revenue and may heighten competition with eBay Inc.’s PayPal unit.

Exact details of the search company’s planned service are not known. But the knowledgeable people say it could have similarities with PayPal, which allows consumers to pay for purchases on Web sites by funding electronic-payment accounts from their credit cards or checking accounts. Some consumers like PayPal for the security it offers, since it allows them to share their banking or credit-card numbers only with PayPal without having to divulge the information to merchants.

Spokespeople for Google and PayPal declined to comment.

For Google, Mountain View, Calif., a payment service could represent a significant expansion beyond online advertising, which generated 99% of its $3.2 billion in revenue last year. Online-payment providers typically generate revenue by taking a commission on each transaction.

Depending on the exact details, Google’s move could potentially threaten eBay’s successful PayPal service, which generated $233.1 million, or 23% of eBay’s revenue in the first quarter. PayPal has been widely adopted by buyers and sellers on eBay’s auction marketplace as a way to pay for purchases. Recently, eBay has been trying to expand PayPal’s presence as a payment system for other Web sites. In the first quarter, 71% of PayPal’s revenue came from eBay auctions, the company says.

“It could be a pretty big negative for eBay if it happens,” says Safa Rashtchy, Internet analyst at Piper Jaffray. Mr. Rashtchy said he believes Google is also working on a classified-listing service, which also would compete with eBay, San Jose, Calif.

The moves would highlight the growing rivalry between the two Internet companies, even while eBay itself is a big buyer of Google’s online ads. For example, many eBay sellers now also sell through their own Web sites, to which they attract shoppers by buying search-related ads on Google.

Google has offered a hint that it might set up an online-payment service. Its Web site says the company will eventually allow consumers to pay to view videos online. But Google to date has not provided any details of any payment-service plans. Google currently accepts credit-card payments for some services, including advertisements and customized research.

Rumors about a new Google payment service escalated following a panel discussion at a Piper Jaffray Internet conference on Thursday. At the conference, Scot Wingo, chief executive of ChannelAdvisor, a Morrisville, N.C. e-commerce consulting firm, said he believed the payment service would be launched soon. In an interview, Mr. Wingo said he based his statement on questions from retailers with which his company works. Mr. Wingo said the retailers have asked him whether ChannelAdvisor would support the service, which some believe goes by the code name Google Wallet.

During the discussion, Patrick Byrne, president of online retailer Inc., recalls saying, “Yes, this Google Wallet sounds like it might be great. But is all this public yet?” In an interview, Mr. Byrne says he has not had any “substantive discussions” with Google about a payment service.

Beyond a possible additional revenue stream, an electronic-payment service could give Google more insight into the effectiveness of its core advertising service. Google might be able to better track whether users who click on search-related advertisements make purchases from the advertiser.

More here.