"PayPal Here" -- as the service is called -- launches in the United States, Canada, Australia and Hong Kong on Thursday. Small business merchants in those countries can sign up and get a free, triangle-shaped card reader and mobile application to affix to mobile phones.

That gadget -- sometimes referred to as a dongle -- plugs right into the top of devices like Apple Inc iPhones and, soon, Google Inc Android smart phones, allowing merchants to take payments through these gadgets on the go.

Such an approach -- pioneered by Jack Dorsey's Square among others -- differs from other mobile payment models, including the installing of "near-field communications" chips for smartphones, which can then be tapped on sensors to make payments.

Concerns about security and privacy however have hampered broader efforts to roll out mobile payments. But PayPal said customer card information will be encrypted by the triangular card reader before transactions are sent to the PayPal app on the mobile device. This prevents customer data from being lost or stolen from merchants' smartphones, it said.

Another obstacle has been the difficulty of payment processing, which in other models can involve linking accounts among carriers and major banks or credit card companies. PayPal's merchants can sign up for a PayPal debit card, go to an ATM, and withdraw money accumulated from sales, said David Marcus, vice president of mobile at PayPal.

PayPal charges a fee of 2.7 percent of the purchase price for all types of credit and debit cards -- including those issued by American Express Co; transaction fees for processing AmEx cards are often higher on other services. That compares with the 2.75 percent charged by Square.

THE PHYSICAL WORLD

PayPal is a dominant online payment processor, but the company is trying to expand into the physical world. It has a point of sale service that it hopes big retailers will use in thousands of stores. Now it is going after much smaller merchants with the new swipe device.

The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010, according to research and advisory firm Aite Group.

The market for mobile card acceptance by small businesses and individual merchants is probably about $4 billion currently, but it is growing fast, Rick Oglesby of Aite Group said.

Square, started in 2009 by Twitter founder Dorsey, leads this niche of the mobile payments market, according to Oglesby. The service is currently only offered in the United States.

Square is known for its own square-shaped card reader that attaches to the top of iPhones and other mobile devices. It has been a hit among small merchants, such as cab drivers.

The company is now processing more than $4 billion in payments a year and over 1 million people accept credit cards through its dongle. Visa Inc bought a stake in Square last year.

Intuit Inc, known for its accounting software, launched a mobile payment service for small businesses called GoPayment in May 2009 and unveiled a free version in early 2011 that came with a free card reading device.

GoPayment is about half the size of Square, Oglesby estimated.

"About 1.5 million small merchants are using these dongles now," he said.

PayPal has a good chance of grabbing some of the millions of small merchants who still do not accept credit and debit cards, Oglesby added.

"It's a big market and it's growing very rapidly," he said. "Most providers think there are 17 to 20 million small businesses in the U.S. that are not accepting cards."

(Reporting By Alistair Barr; Editing by Gerald E. McCormick)

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