This has been an exciting weekend for tech news folks.

I read one of the most depressing articles ever regarding AOL and Yahoo contemplating the use of a form of electronic postage (I might cover the issue in detail next week after I look into it further).

But the article that really caught my eye was from The Wall Street Journal.

It was about how PayPal was reacting to the announcement from Google (Nasdaq Symbol: GOOG) that it was planning to launch its own online payment service. FYI: PayPal is a division of eBay (Nasdaq Symbol: EBAY). Google’s CEO, Eric Schmidt, announced that Google will soon be launching GBuy, an online payment system.

However, he contends that this service will NOT directly compete with PayPal.

This threw PayPal’s President, Jeff Jordan, into a bit of a frenzy. He outright says he doesn’t believe Mr. Schmidt, and feels Google will definitely try to infiltrate PayPal’s market. The difference between PayPal and most other online transaction processors is its ability to allow users to deposit money into a virtual bank account, then use this account to make purchases from other PayPal users.

The great thing about this system is the anonymity behind it -- especially on sites like eBay, where a typical user isn’t exactly sure who he’s buying from. This natural cohesiveness with eBay’s model is what led eBay to eventually acquire PayPal outright. Now, PayPal accounts for roughly 23% of eBay’s revenue. Furthermore, eBay-originated transactions account for the vast majority of PayPal’s revenue.

Now Google enters the mix -- and, according to Jeff Jordan, Google is a “legitimate competitive threat.” Well, let’s take a look for ourselves at how this scenario could play out ...

On one side, we have PayPal, the market leader in online payment transactions -- currently holding 24% of the market. The company recently acquired VeriSign’s online payment unit so it could begin to sign-up new online merchants. FYI: If you wanted to sell something on a web site, you would go to a company like VeriSign for a security certificate (makes sure the site can securely accept personal and credit information).

However, PayPal is in a vulnerable position: The vast majority of its revenue is still dependent on eBay. Any weakness in eBay’s sales would directly affect PayPal’s ability to compete. Also, because PayPal built its brand by catering to individual merchants and auctioneers on eBay, most serious online merchants wouldn’t consider the company as a technologically advanced e-commerce solution. But, to its credit, PayPal has been making progress in lining up new merchants. The company is aggressively courting Dell and other large online retailers to begin accepting PayPal as a payment option on their sites. That would certainly give PayPal a bit more credibility with other e-retailers. But we’ll have to wait and see how these deals pan out.

On the other side of the field we have Google. This is a company that has proven time and time again that it can penetrate established markets by introducing low-cost and higher quality solutions than the existing competitors. Can they do the same with GBuy? We obviously can’t know for sure, but this is what we do know: Google handles online advertising for tens of thousands of merchants, large and small.

These are companies that already consider Google an integral part of their online marketing, brand building and e-commerce strategy. Would it be that much of a leap for them to begin offering a Google payment option on their websites? I don’t think it will be much of a challenge for Google to roll over a good portion of its advertisers. The technology itself is simple enough, and for the thousands of small merchants out there who don’t want to deal with several companies in order to run an online business, Google could definitely be an answer to their prayers.

Imagine an end-to-end marketing and transaction processing company. The company can send you traffic, provide you with reports on how well your traffic is converting into sales, and then handle the sales and sales reporting for you. At some point, all you’d be doing is feeding money into one end of the machine, and watching more money come out of the other -- and shipping a package or two in the process, of course. I’m not saying Google is the likely winner here, but from a competitive perspective, I think the company is in a great position to quickly make some headway in this space.

The one thing PayPal has in its favor is its relationship with eBay. We’ll have to see how wild eBay is about allowing its merchants to offer GBuy as a potential payment solution in lieu of PayPal. As long as PayPal can keep its dominance within eBay, and aggressively acquire new merchant partnerships, they should be able to fend off Google.

But folks, as always, only time will tell.

Until next time folks ...