Will Google downshift on Checkout for PayPal?

Google may be investigating a new payments strategy that would phase out---or at least downplay---its Checkout system, according to an analyst.

Susquehanna Financial analyst Marianne Wolk issued an upbeat assessment of e-commerce following last week's Internet Retailer conference. On a high level, online retailing is on track to grow 12 percent to 15 percent in 2010.

But what was notable is that Google is testing cost per action (CPA) ads with its shopping results. Google is testing these ads with hundreds of advertisers. Wolk wrote in a research note:

Google confirmed it is beta testing CPA pricing with Shopping results, a major step forward into the eCommerce space – new news regarding this potentially significant emerging growth vehicle. For some time, our contacts have indicated Google has been testing CPA ads and we have been optimistic this could lead to much higher revenue per query (RPQ) in the 4Q10 holiday season. Yet this appears relatively unknown by the investor community; with the confirmation last week that Google is testing CPA ads with “hundreds" of advertisers, this major new growth driver for Google could gain more credence. Where we estimate Google sees ~$0.50 per click from CPC ads, it could glean tens of dollars or more by capturing 8%+/- of the final value of sales it generates for retailers via its comparison shopping network.

With CPA ads, Google will have all the data it needs to optimize its systems. Wolk argues that Checkout won't be important to Google if CPA ads take off. Google is likely to develop coupons and other e-commerce initiatives. Wolk added:

We also learned Google is investigating a new payment strategy, shifting away from Google Checkout, and wonder if a Google partnership with eBay’s PayPal is possible. As CPA gets Google the valuable conversion data it seeks to improve ad targeting, Checkout is no longer as strategically important.

Among the key points from Wolk:

• Google is testing CPA sponsored links with advertisers such as Zappos and Home Depot.
• Google is getting 8 percent to 10 percent of the final value of goods sold paid only when a consumer completes a purchase.
• CPA advertising gives Google data beyond search and click through behavior. Google will get insight on consumer buying behavior.

Wolk's prediction makes some sense. Google's Checkout hasn't upended PayPal, which is eBay's growth engine.

Here's a screenshot of CPA ads pointed out by Wolk.

Buyer data is the primary reason Checkout was around in the first place. Now with CPA ads, Google may soon be cooking up a new payment strategy.