Google's Investment in Zynga Could Impact PayPal

TechCrunch wrote on its blog on Saturday that Google made a secret investment last month in Zynga, a social gaming developer. You may not have heard of Zynga, but if you are on Facebook, you are probably familiar with their games such as the popular FarmVille, where people buy virtual goods such as "John Deere tractors."

Google's investment in Zynga could spell trouble for eBay's payment service PayPal: Michael Arrington wrote that he wouldn't be surprised to see Zynga replace PayPal with Google Checkout as the primary payment option. Selling low-priced, virtual items on Facebook is big business - according to Citi Group, Zynga is the second largest Paypal merchant after eBay and said Paypal represented 50% of total payments on Facebook.

The problem for Google is that its payment service doesn't currently offer fees conducive to micropayments - it can't beat PayPal's micropayment processing fees of 5 percent plus 5 cents, one of the best rates for merchants who process a high volume of low-priced transactions.

In an interview I conducted with PayPal's Anuj Nayar in March, he said PayPal's micropayments service solved certain social networking and virtual goods challenges in ecommerce. "PayPal has been on Facebook since it first opened up its platform to developers." Indeed, many social networking and gaming companies integrate with PayPal's Adaptive API to make the payment process seamless for customers.

Google has some catching up to do if it wants to take share away from PayPal on Zynga, but there have been reports that Google is working on a micropayments service; however, the service is geared toward news content.

PayPal has been aggressive with its risk-management practices in the past year or so, increasing the number of payment holds and rolling reserves on merchants and publishers, so competition from Google would likely be welcomed.

There are many companies trying to gain a foothold in the mobile payments space. On Friday, Zong announced it had hired two key PayPal players - Elena Krasnoperova and Stephane Kasriel.

It would seem that it's too early in the game to cede micropayments to PayPal, but they have a healthy head start.