Paypal’s been getting a lot of flack lately: pathetic customer service, misleading terms and conditions, their reluctance to dispute a charge back, and cases of fraud. But most people endured it because they didn’t have any other option. Merchants, in particular, were forced to use it because of business they did on EBay (who, incidentally, are part-owners of Paypal and get a sizeable share of the net profits of each transaction).

Well, now there’s another option to Paypal—Google Base. Once primarily used to upload content on to the web, it’s now being developed as a payment intermediation site. Buyers can get items using their Google account, while sellers can register to have Google accept payments on their behalf. It is clearly positioning itself against “Buy It Now”, one of EBay’s biggest revenue streams that was responsible for 34% of its business last year.

Google is beta-tasting Google Base right now, but the industry buzz has already got people counting the days until the program is running full-force.  Many of them are just so sick of Paypal’s service that they’re glad to find another way of coursing Internet payment transactions.

One of the benefits that have merchants—especially the larger e-businesses—all excited is that Google Base will save them a lot of money on fees. Google Base, unlike Paypal, will not be charging for listing. It also does away with the cumbersome selling model of EBay. Most companies find the auction model to be too erratic for mass-sales, since they’d rather sell at a fixed price.  They employed EBay because it was a convenient distribution channel with a built in payment system.  That was enough to keep them “loyal” even with the exorbitant fees, the lousy customer service—EBay wouldn’t even release its complaints number until a court order forced them to—and a weak security system that was vulnerable to phishing and other Internet hacking. When you don’t have competition, you can afford to be inefficient.

But With Google Base offering very similar services, and at lower costs, EBay may lose a big chunk of its business.And that’s a big blow to the company, since a large percentage of their profits come from companies, and not the individuals who are looking for a quick way of disposing of one or two items from a personal collection. (Think about it: how much money could the company make from someone trying to sell his old Elvis records?)

Especially since Google Base is no ordinary competitor. First of all, you can’t just argue with the brand equity of Google: it’s one of the biggest Internet names, practically synonymous to surfing. It also has a solid track record in payments and collections, given the large volumes of money—reaching billions—it handles in its transactions with advertisers and partners  Google Base simply takes this software and system, and reformats it for other people.

Second of all, as part of a search engine company, Google Base offers some very valuable services that are intrinsically valuable to someone doing business on the Internet. For example, it will allow merchants to feed all their listings to Google for free, rather than charging them for being part of their directory. (Of course, it’s not completely for free; they will take a cut from the transactions made, but it’s easier for smaller companies with small starting capitals to absorb that cost rather than make an initial investment.) And, the more obvious benefit is that they no longer have to buy click-through ads on Google. Using Google Base automatically indexes their site, making it ready to buy.  It’s a smart business move whatever way you look at it—especially since everybody uses Google, even those who wouldn’t bother with EBay.

EBay and PayPal should do some serious rethinking on the way they charge, and treat, their businesses, if they want to survive. For a long time they didn’t have any competition; they owned the market, and they controlled it. But all they have to do is take a look at what happened in China with Ali Baba, and the resulting collapse in listings. Nothing is permanent, especially nothing on the Internet.

They wouldn’t be under that much threat if they had bothered to be fair to begin with. Then, they’d at least be the first—and in marketing, being the first is a clear edge: you’re top of mind, people are used to dealing with you, and the competitor not only has to be good but better (or at least, cheaper). But people’s experience with PayPal have been nothing short of horrific. It’s not just the fees. It’s how little they get in terms of customer support and guaranteed satisfaction in exchange for them.

There are horror stories of people complaining about fraudulent transactions, and PayPal brushing them off and saying it’s their fault and then charging them the cost of researching on their case. Some say it’s actually easier to just ask for a charge back from their credit card rather than course it through PayPal, which will take weeks to refund the money if they decide to refund, and only after sending you an automatic email message because they won’t bother to hire a decent customer representative.

There are hundreds of posts on consumer boards of accounts being wiped out because of a bug in the security system, and a clause in their long contract that absolves them of any responsibility to refund or trace the money.

So PayPal doesn’t have any equity to protect itself from a competitor, and even EBay’s reputation for simplifying the buying and selling process isn’t enough. The company always wants its cut for both selling the item and processing the payments, and that’s got to hurt profits. The combination of Google Base and other Google services offers a more cost-effective, more reliable, and more user-friendly alternative to both individuals and high-volume sellers who previously used EBay as a storefront. Sadly, by the time PayPal and EBay come up with a battle plan (perhaps in the form of EBay Express) it might be a case of too little, too late.