What Esquire Magazine online has to say about PayPal:

I get ornery when I learn that a friend hasn't yet signed up for PayPal, the Internet-based service that lets you e-mail money to someone. I take PayPal abstention personally. It's antisocial, anathema to making human commerce work smoothly.

Over the last year, PayPal has exploded. In January 2000, the then-nascent service had just ten thousand users; today, it claims more than five million. Yet most people whom I've tried to educate about PayPal—especially those who don't shop on eBay—have never heard of it. Briefly put, PayPal lets anyone with an e-mail account send money to anyone else with an e-mail account. The service signals an enormous shift in the way we will be using money in the near future. By next year, it could turn your PalmPilot or mobile phone into a personal ATM machine.

You start with a simple sign-up procedure at paypal.com. You pick the kind of account you want to draw money out of and let money flow into. Any credit card or bank account will do. You can even put money into a PayPal money-market account that earns a couple of percentage points over bank rates. Send money and your account is debited; receive money and it is credited. Voilà! The only catch is that the person on the other end has to have a PayPal account, too. The service pays new account holders five dollars and pays those who lure them in another five dollars.

Using those ancient and now-quaint strategies of being the first mover, being a viral marketer, and giving away something for nothing, PayPal has shaken up the staid payments industry. "Payments" is what bankers call the part of their business that takes a piece of the action when businesses and consumers move money around. It has long been dominated by the huge banks and financial-services firms that bring us the likes of MasterCard and Visa. Anyone with a credit card knows how the payments industry exacts money, often usuriously, with membership fees, interest, and late charges. Yet an even richer vig is paid by businesses that accept the cards. They pay fees for maintaining their merchant accounts and then pay a percentage every time a customer pays with plastic. For large businesses with the clout to negotiate, the fees hover around a manageable 1.5 percent on each transaction (2.5 for online charges). For small merchants, transaction fees run as high as 5 percent. Now along comes PayPal, charging them only 2.2 percent plus 30 cents per transaction. (Merely sending money costs nothing.) According to Avivah Litan of the GartnerGroup, three hundred thousand of those who've signed up with PayPal run mom-and-pop businesses.

Even for large companies, services like PayPal can be the best solution for "micropayments" that are simply too small or troublesome for a credit-card transaction—online music, for example. "Both merchants and credit-card companies find credit-card fees unworkable for small transactions," says Litan. "So [services like PayPal] make sense for digital content such as music or article databases where there is a small charge per use. One in four e-tailers have things to sell that are low dollar value, but there's still no widespread micropayments option."

For a measure of the thunderbolt PayPal struck into the world of small businesses and small transactions, just look at eBay, the world's largest gathering place of small-time sellers and buyers. These transactions are often labeled person-to-person (P2P), even though a good number of those persons make their living buying and selling through the site. A year and a half ago, virtually all the business among eBay's six million users was closed with a check or money order sent through the mail. Today, PayPal is a preferred payment method for half of all eBay sales. The new system has been so successful that eBay has aped it with its own growing P2P service, called Billpoint. Yahoo, America Online, Citibank, Bank One, and others have joined in with like services, though they, like eBay, usually pick a proprietary niche to ply.