It's PayPal Time Online retailers are discovering that alternative payment services fit their businesses to a "T."

A growing number of Web retailers are plunging into the world ofalternative online payment options to replace or supplement creditcard payments. Alternatives include a "bill me later"button on the site, payment by paper or electronic check, or theuse of payment services such as PayPal. Although the use of otherpayment systems reflects ongoing consumer concern about onlinecredit card fraud, these options are often less expensive andeasier to use than setting up a merchant account, which is requiredto process credit card payments.

Most e-tailers favor PayPal's service. Based in MountainView, California, it's the world's largest online paymentsystem. Recently acquired by eBay, PayPal lets consumers send moneyto anyone with an e-mail address through their credit card orchecking account. Consumers sign up once for the free service-afterthat, they use their account number to buy products onlinesecurely, conveniently and cost-effectively.

A Merchant's Pal?

Currently, PayPal has more than 20 million registered users andmore than 3 million business accounts, and that number is growingby an average of 28,000 accounts per day. While PayPal may be bestknown as the leading online payment service for online auctionsites (buyers use it to make instant payments), it is being usedmore at regular e-commerce sites. Price is one factor luring onlinemerchants. "There is a big interest in PayPal from smallonline retailers that can't afford credit card accounts,"says Avivah Litan, a vice president at Gartner Inc. Ingeneral, PayPal charges just 3.3 percent per transaction. Those whouse traditional merchant accounts know they have to pay for costssuch as setup fees and transaction fees.

Rob Leathern, senior analyst at Jupiter Research in New York City, agrees."PayPal is a good way to accept credit card payments for smallmerchants lacking volume for a credit card merchant account orwishing to easily set up a way to accept payments online," hesays. "They also offer neat features, like integration withUPS, which may be valuable to small merchants."

The cost-effectiveness of PayPal is demonstrated in severalscenarios. For example, if entrepreneurs have sales of $250 permonth, they pay a credit card company about 35 percent of everytransaction, and if that number goes up to $7,500 per month, theyonly pay about 5 percent. "But PayPal is always charging thesame 3.3 percent," Litan says.

It's also easy to use. A merchant adds PayPal's"Web Accept" button to its site; customers then click onthe button and pay with their PayPal account. The payment isprocessed and sent directly to the merchant's account, then thecustomer is returned to the Web site.

Jennifer Geronaitis of Tea Time World Wide, a small online retailer oftea, gifts and gourmet foods in Hanson, Massachusetts, began usingPayPal over a year ago because it was less costly than thetraditional route. "I was concerned about paying a monthly feefor a merchant account without knowing what my online sales wouldbe," says the 39-year-old founder, whose company made lessthan $1 million in sales last year.

Geronaitis, who gives PayPal about 2.9 percent plus 30 cents pertransaction, says she examined merchant account fees last yearbefore signing on with PayPal and found that fees would have beenabout $50 per month--plus 2.25 percent of the sale and $0.25 pertransaction. "The fees for a merchant account," she says,"were much more for a small business than PayPal until thesales exceed about $6,000 a month, at which point the fees balancedout."

PayPal, however, may not be the perfect solution. WhenGeronaitis first signed up, she faced challenges with shipping:Initially, PayPal said shipping had to be calculated on a dollarscale or by attaching a shipping amount to each product. "[So]when a product was heavy, I lost money," she says. "Now acompany can override the scale and attach a specific shipping toeach product. The best scenario would be if a program calculatedshipping based on carrier, weight and destination."

It's a good idea for online merchants to consider severalfactors before signing up with PayPal. "Small businesses thathave a regular credit card merchant account are probably not goingto get a ton of additional value from PayPal," says Leathern."Merchants should survey customers first and see if there isinterest in using PayPal. It [probably] depends on the nature oftheir business."

Melissa Campanelli is a marketing and technology writer inBrooklyn, New York.