PayPal leads the way in digital cash movement

With another 140,000 users signing up each week, PayPal and its corporate alter ego, X.com, are leading the push to conduct more e-commerce with "digital cash" — rather than credit cards.

"I won't even buy something from someone who doesn't take PayPal," said Lewis, who runs a collectibles business in Cincinnati. "I'm a big fan of the service because you don't have to hassle with going to a bank for a money order or deal with a credit card."

Palo Alto-based PayPal, which morphed from an obscure computer security company a year ago, believes it is on the threshold of becoming an e-commerce staple, but like most dot-coms, it remains unprofitable. And formidable challenges loom, including trying to charge for what had until recently been free.

A buyer using PayPal provides a credit card or bank account number so PayPal can withdraw a specified amount. The seller is then notified by e-mail, and has the option of either cashing out or carrying a digital cash balance to conduct other online business.

The concept's primary market so far has been auction sites, where strangers transacting business like the speedy, reliable payments.

But PayPal's brain trust envisions the day when digital cash will become common currency throughout the economy.

To encourage more of its accountholders to maintain cybercash balances, PayPal will soon begin paying interest. And making PayPal even more bank-like, the service plans to issue debit cards so its users can get cash from online accounts at grocery stores and other retailers.

But unlike banks, PayPal accounts aren't insured by the Federal Deposit Insurance Corp, though PayPal does offer up to $100,000 in insurance coverage per account.

"The thing that is so overwhelming about all this is that money touches just about everything," said Peter Thiel, PayPal's chairman and co-founder. "There are so many other payment points that we can go after. Wouldn't it be great if we could all interface with a single payment system like ours?"

Before PayPal tries to replace the dollar bill, the company has to figure out how to turn a profit while also finding a new executive team to help manage breakneck growth. Its payroll swelled from 24 workers last October to 500 this year.

PayPal has already raised some serious money — about $170 million in venture capital, including $130 million in the last seven months.