By Therese Poletti

A David and Goliath face-off may be brewing in one sector of the nascent mobile payment arena.

The Goliath is PayPal, eBay's (EBAY) successful online payments business, where PayPal is the preferred payment method of eBay, and increasingly seen as a payment option on other websites. It has 100 million active consumer accounts.

The David in this scenario is Square, a San Francisco-based start-up company founded by Jack Dorsey, who is also co-founder and executive chairman of Twitter.

In recent months, PayPal has started making a big push beyond the Internet and it now wants to become a serious payment option in the bricks-and-mortar world as an alternative to credit cards, debit cards and cash. These moves also put PayPal in more direct competition with credit-card giants, with which it also partners.

On eBay's earnings conference call last week, the company's chief executive, John Donahoe, highlighted PayPal's recent moves, noting that 2012 will be a year for "piloting, testing and learning." Home Depot (HD) stores are the first retailer where consumers can use PayPal at checkout by entering their phone number and a pin number, or swiping a plastic PayPal card or their smartphone. The setup gives consumers more flexibility, with a window of seven business days to choose the account they want to use to pay.

Another effort called PayPal Here was launched last month to focus on small businesses, with a device that attaches to smartphones and swipes credit cards, similar to the device launched in 2009 by Square.

"We have a lot of other initiatives to bring PayPal into the physical world," said Hill Ferguson, vice president of mobile at PayPal, in an interview. "PayPal's goal is to be accepted everywhere."

PayPal isn't alone with these grandiose ambitions. Google (GOOG) has its own competing plans for the physical world, with its Google Wallet and many others, including some credit-card companies, and carriers including AT&T and Verizon, which are said to be working on a smartphone payment system called Isis.

Trying to change the retail dynamics, where most big retailers accept credit cards, to switch to payments with smartphones seems like a solution in need of a problem, for now. The companies say more mobile payment options will let people leave their wallets at home, and offer consumers more loyalty programs, targeted offers and convenience.

"I think mobile has become such as central part of our lives that more people are likely to leave the house without their wallet than without their cell phone," Ferguson said. A recent Pew Internet study showed that 65% of respondents agreed that "by 2020, most people will have embraced and fully adopted the use of smart-device swiping for purchases they make, nearly eliminating the need for cash or credit cards."

For now, however, Wall Street is looking at mobile payments as incremental revenue opportunities.

"Having spoken to a lot of retailers, they don't change very quickly, especially when it's their check-out area," said Colin Sebastian, an analyst with Robert W. Baird & Co. "They don't want to do anything that disrupts that process. Even if Google and PayPal can provide a bunch of analytics, retailers will be very cautious before they change the way transactions occur."

But PayPal is also shrewdly targeting the portion of the market that does need help with payments, especially credit cards: small businesses. It is not alone seeing the potential, where it is following Square and others.

A spokeswoman for Square declined to comment on PayPal's entry. She added that Square has over one million users of its portable device, which enables individuals and small businesses to accept credit-card payments on their smartphone. Square charges a flat fee of 2.75% per transaction, and eliminates all the other monthly fees charged by credit-card companies that are prohibitive for small mom-and-pop businesses.

"Obviously we weren't the first company to launch a product like this, but PayPal Here is a very different product from the competitors," Ferguson said. PayPal Here lets businesses accept other forms of payment, such as personal checks, has an invoicing system and lets the business owners get cash from the payment instantly. "It took a bit longer but we built something better and is exactly what small businesses want." PayPal Here also has a slightly lower per transaction fee of 2.7%.

Since its launch in mid-March, PayPal here has signed up over 200,000 merchants. "We are just getting started," Ferguson said. PayPal Here is now live in four countries and it plans to launch in every country it already does business in. "We are a global payments company."

PayPal's arrival certainly validates the business that Square has developed since its launch in 2009. Last year, Intuit (INTU) , the developer of personal and small-business finance software, launched its own version, called Intuit GoPayment, with a 2.7% per transaction fee, or as an option, a $12.95 a monthly service fee, and a lower per transaction fee of 1.7%.

Not to be left behind is NCR (NCR) , the developer of the first mechanical cash register as the National Cash Register Co. NCR is rolling out NCR Silver, a "cloud-based retail system," which will let independent retailers accept payments via iPhone or the iPad tablet.

Square isn't standing still either. In March, it launched an app called Square Register, which turns Apple' iPad into a cash register and point-of-sale device for small merchants. The company was recently in talks for additional venture funding, reportedly at a valuation of $4 billion.

As the competition starts to heat up, it's way too early to declare any winners or losers in this nascent mobile payments arena or how the future of money will shake out. But investors watching PayPal's entry into the analog world might also see some other beneficiaries, as one of the winners may be small businesses.

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