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Many are trumpeting the arrival of Google Checkout as a foil against PayPal, finally heralding a second revenue stream for Google and a better choice for consumers. Or is it? As a long-time PayPal engineer, I'm familiar with many of the things that make the internet payments business fundamentally different from almost any other. This time, I think that Google's finally stretched itself too thin. So here are Five Reasons Why Google Checkout is the Beginning of the End:


1. Google is bad at fighting fraud.

What's the number one scuttlebutt on the internet today about looming threats to Google? Not Microsoft or Yahoo, but click fraud. The latest independent forensics tests estimate overall click fraud rates at around 13.7%. Acceptable fraud rates for payment systems are around 0.5% (PayPal), even fraud rates as high as 2% (typical during PayPal's earlier days) are unacceptably unprofitable. This isn't just the "ambient" rate of non-paying customers or people who buy porn and then do a chargeback, it's the result of concentrated, organized hackers. The primary method of illegally making money for hackers today is Adsense click fraud. And Google knows this.

What makes this important is that Google is unlikely to have developed high expertise in anti-fraud. Google's revenues actually indirectly benefit from click fraud: the more hackers click on the ads, the more money Google makes, so there's no immediate financial incentive to fight the fraud too hard. Clearly, this is not true in the long-term as advertisers realize a declining ROI and begin to rein in their ad spending, but in the meantime there's a lot of questionable short-term profit to be had by just being a little bit lazy (and good computer programmers are lazy). Conversely, all of PayPal's formative years were spent developing sophisticated proprietary anti-fraud systems. The difference is that PayPal had to learn to build anti-fraud systems or die, whereas for Google, fighting fraud only benefits the vague long-term goal of not eventually pissing off their advertisers. While that's certainly worthwhile, they obviously have other, more immediately pressing matters to attend to, like their search engine wars. The level of focus simply hasn't been demanded of them.

There is a common myth on the internet that PayPal was a monopoly right from the beginning. Nothing could be further from the truth. At the time of PayPal's founding, there were over 20 different companies trying to process payments on the internet. Every single one of them eventually succumbed not to competition from PayPal, but from massive hacker fraud. PayPal succeeded because it focused on fighting fraud and was the only one to "run faster than the wolves." Can Google do the same? Unlikely, because...