PayPal has just launched a new service called PayPal Mobile. This service allows a PayPal user with an active mobile phone account to send a payment to another PayPal account -- even another mobile user with a PayPal account. Of course the PayPal user at the other end of the transaction could be either an individual or -- more importantly -- a merchant.

This system clears the way for PayPal to enter the potentially massive "micro-payment" market. With PayPal Mobile anyone with a PayPal account could pay electronically for goods purchased from any merchant also having a PayPal account. Of course this capability already exists, but most PayPal users are stuck with making PayPal transactions using their computers.

** SMS-based payment system

PayPal Mobile is mobile phone and SMS-based, which means you use text messaging to send the payment. That completely frees the user from dependence on his or her computer to access his or her PayPal account.

PayPal Mobile payments are sent by sending a text message to 729725 (paypal), and then keying in the amount and destination of the payment. The destination can be another mobile number, a regular land-line number, or the person's email address (the one registered with PayPal).

The new system currently only works with mobile phones in the U.K., U.S., and Canada, but is expected to expand to other countries once the bugs are worked out.

To make use of this system, you need an active PayPal account. Login into your account and go to your Profile. Click on Phone, and then click on the "Activate Payments" link. You will be asked to enter a PIN, and will be phoned at your number to confirm your activation.

Normal land-line numbers can be activated too, but of course, text messaging will not work with these. To send money by voice or keypad using your land-line, you call 1-800-4PAYPAL. Once the payment is sent, the person you are sending the money to will be notified by either an automated phone call, or by email.

** Potentially valuable for offline merchants

The important thing to notice about this is that it lets a merchant associate a normal land-line number with his or her PayPal account. So say you're an antique dealer in Toronto. A customer wants to buy something from you and says "Do you take PayPal?"

"Sure", you say, "Just send the payment to 416-123-1234". While he's standing in front of you your customer uses his cell phone to call PayPal and has the payment sent to your number. A minute later you receive an automated call informing you of the payment. And just to make sure, you check your online account to see if the funds have been transferred.

** PayPal is targeting mobile users

It is fairly obvious who PayPal is targeting with this new text messaging payment service. It is a perfect fit for cell phone users who regularly use text messaging, and who also regularly buy things requiring fast, hassle-free micro payments. Digital music is the most obvious example.

Other micro-payment systems are typically tied in with cell phone companies, payment processing companies that focus on merchant services, or in-house solutions like those provided by iTunes. That's all right if you deal with a limited number of vendors. But for customers who want to use this service for several vendors, they are forced to use a mish mash of payment processors depending on the merchant they are dealing with.

Clearly there is a need for a reliable third party system that stands apart from specific merchants, specific banks, and specific credit card companies. A payment processing service provided by a broadly-used and legitimate money clearing house like PayPal seems like a pretty good idea, and one that has the potential to seriously increase the PayPal user base at the same time.