The online payments company is taking its first steps outside of e-commerce.

Online payment company PayPal has taken its first steps outside of e-commerce with the announcement late Friday that The Home Depot Inc. is testing PayPal acceptance at five of its stores. Neither PayPal, a unit of eBay Inc., nor Home Depot, would disclose where the stores are or how many PayPal employees are involved in the test.

PayPal says the users can pay with one of two methods. One method allows a consumer to pay by entering her phone number as well as a personal identification number into a point-of-sale terminal. The telephone number would have to be previously associated with her PayPal account. Users also can swipe a PayPal-issued card tied to their PayPal accounts.

Home Depot would not say how long the test will run, but added that in the next few weeks it will be expanded to customers at the five stores who are not PayPal employees.

PayPal widely broadcast its in-store intentions last year, declaring that PayPal acceptance at bricks-and-mortar stores was one way it plans to grow. PayPal was on track to process $100 billion in online transactions in 2011, a PayPal spokesman said at the time, but that is a small fraction of the $8 trillion in global transactions at the retail point of sale, as calculated by The Economist Intelligence Unit, the research arm of The Economist magazine.

“PayPal has made it clear it wants to be a player in bricks-and-mortar stores,” says George Peabody, director of the emerging technology advisory service at consulting firm Mercator Advisory Group Inc. “And they made it clear they want to play with the largest retailers.”


To do that, however, takes a lot of work because PayPal has to be integrated into the retailer’s point-of-sale system, a difficult task given the size and complexity of POS systems at major retail chains, Peabody says. Retailers and PayPal have to update the POS software to accommodate the new payment option.

EBay’s recent acquisitions support this shift in PayPal’s strategy, Peabody says. Among the most recent was its purchase in April of Where, a provider of advertising services, search and mobile apps that support shopping in nearby stores. That followed the December 2010 purchase of Milo, a local search utility that forms the bedrock for much of PayPal’s in-store effort. Retailers supply a data feed of their inventory to eBay so when a consumer searches for a product using Milo she sees local retailers that have the product in stock.

Earlier in 2010, eBay bought RedLaser, a bar code scanning app that enables in-store shoppers to comparison shop on the spot. Shoppers hold an iPhone up to a product and RedLaser scans the bar code, identifies the item and product details, and searches the web for similar products.

Home Depot is the first of 20 retailers working with PayPal to test the payment scheme in store.