(October 25, 2006) PayPal Inc. 2-year-old campaign to diversify its transaction-processing business beyond the online auction marketplace of its parent, eBay Inc., is starting to show results. Some 37% of the processor’s payment volume in the three months ended Sept. 30 came from merchants outside of eBay, up from 32% in the year-earlier quarter, according to operating statistics released by eBay. That’s also an increase over the 35% PayPal saw from Internet merchants in the second quarter.

The company processed total volume of $9.12 billion on 146.2 million transactions in the third quarter. These numbers were up only slightly over the second quarter, but represented increases of 37% and 24%, respectively, over the year-ago period. The processor’s figures for payment volume and transactions do not include traffic processed through its merchant-gateway unit, which was acquired last year from VeriSign Inc.

The rise in non-eBay business comes after a long string of quarters in which PayPal’s eBay volume hovered stubbornly at or just under 70% of its total volume. PayPal began in 2004 to court large Internet retailers as well as smaller businesses, introducing new technology to make it easier to accept PayPal and process transactions. Most recently, computer maker Hewlett Packard Co. has agreed to accept PayPal on its site selling home and home-office equipment. And in August, chain bookseller Barnes & Noble Inc. started taking PayPal transactions on its site. So far, more than 30 merchants with $5 million or more in annual Web sales now take payment through PayPal (Digital Transactions News, Aug. 17). Indeed, the company’s own numbers indicate it has only started to penetrate this market, where it claims just 0.3% of $102 billion in annual sales volume.

Helping to attract online merchants is the San Jose, Calif.-based processor’s rapid growth in accounts, which reached 122.5 million in the third quarter, up 41% from a year earlier. Active accounts, those that sent or received at least one payment through PayPal during the quarter, totaled 30.9 million, a 26% increase.

But PayPal has also sustained some setbacks recently. Late last month, it agreed to pay $1.7 million to defray the costs of investigations conducted by attorneys general in 28 states regarding its consumer practices. As part of the agreement, it said it will shorten its user agreement and give more information on its protection programs. At the same time, it agreed to pay $3.5 million to settle a case pending in a U.S. District Court brought by users who alleged the company wasn’t clear about its consumer protections as they applied to certain transactions. PayPal did not admit liability for any allegations in either case.

Meanwhile, PayPal saw its losses related to fraud and protection programs rise to 0.35% of payment volume, up sharply from 0.27% in the second quarter and from 0.24% a year earlier.