Mediaboss Marketing

by Kevin Kelleher, contributor

FORTUNE -- As long as the Internet has been a venue for commerce, some companies have dreamed of making electronic cash as seamless and intuitive to use as possible: no cash or coins, no check-writing, no typing in or storing credit card numbers. Thanks to the rise of the cloud and the popularity of smarphones, that idea is becoming real.

As a result, the names of companies working to create a so-called digital wallet is growing: startups like Square, big-name companies like eBay (EBAY), Google (GOOG) and Apple (AAPL) or financial services giants like Visa (V) and MasterCard (MA) each hoping for a key role in what could in coming years become a lucrative market.

No company has been working longer at this goal than PayPal. Back when people spoke less of the cloud and more about grid computing, and when mobile phones were too big to fit comfortably inside a pocket, PayPal was laying the foundation for a global e-payment system working through regulatory processes in hundreds of countries, grappling with myriad forms of online fraud and fielding customer complaints.

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Today, PayPal works with 9 million merchants and 106 million active customers. And over the past couple of years, the eBay (EBAY) unit has been quietly assembling a strategy to create a digital wallet for those customers, and potentially many more. But it means improving on offerings from competitors, some of which have large customer bases and ample cash reserves.

It also means placing bets on which standards consumers and merchants will embrace. Will Square-like dongles become an everyday accessory in retail? Or will near-field communications overcome security concerns and become the norm? Will credit- and debit- accounts continue to play a central role? And most importantly, which brands will emerge as the most trusted consumer interface to mobile payments?

Slowly, PayPal's strategy is becoming clearer. After buying startups such as BillMeLater, shopping-engine Milo and app developers WHERE and Redlaser, PayPal has begun rolling out new features most recently its PayPal Here service. Announced last week, PayPal Here was widely seen as a competitor of Square, the startup noted for the dongle that plugs into smartphones for on-the-spot payments in stores and restaurants.

Square is catching on with many retailers. PayPal says it saw $4 billion in payments in 2011 and that it expects to top $7 billion this year. But Square also says it processed $4 billion in payments last year, largely from small brick-and-mortar retailers that PayPal has tended to overlook.

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PayPal's bid for the digital wallet looks strong