The last 6 months have been sobering for Google. Once at the top of the world, Google has seen its share price plummet and the idea that it would be immune to recession has been proven a fallacy.

So Google is doing what any good company does: cutting out the fat. It has already shuttered a number of projects that weren’t going anywhere and is refocusing its efforts on its core business.

But when it comes to Google Checkout, the payments service that some thought might be a PayPal killer, Google is throwing in the towel in the worst way possible: it’s hiking fees.

Effective May 5, Checkout merchants will see their fee structure shifted to a tiered system that’s more expensive. In the UK, the new tiers are:

  • Less than £1500 in monthly sales: 3.4% + £0.20
  • £1500 – £5999.99 in monthly sales: 2.9% + £0.20
  • £6000 – £14999.99 in monthly sales: 2.4% + £0.20
  • £15000 – £54999.99 in monthly sales: 1.9% + £0.20
  • £55000 or more in monthly sales: 1.4% + £0.20

In the US, the new tiers are:

  • Less than $3,000 in monthly sales: 2.9% + $0.30
  • $3,000 – $9,999.99 in monthly sales: 2.5% + $0.30
  • $10,000 – $99,999.99 in monthly sales: 2.2% + $0.30
  • $100,000 or more in monthly sales: 1.9% + $0.30

An additional 1% is tacked on for payments made from outside your home country.

More importantly, Google is cutting out the AdWords free transaction processing it currently offers, which gave many AdWords advertisers the ability to use Checkout with no processing fees.

While Checkout fees are in line with PayPal’s, I think Google’s changes show that Google is essentially throwing in the towel on competing with PayPal. PayPal is far from perfect (I have my personal complaints) but without a distinct competitive advantage, Google Checkout isn’t compelling.

While I guess that you could argue lower fees and an AdWords subsidy didn’t do much for Google, now that its fees will be almost identical to PayPal’s and AdWords advertisers won’t be able to earn free use of Checkout, there’s definitely no possible competitive advantage to be had for Google in this space. Therefore I think it’s safe to call any possible battle between PayPal and Checkout over.

I see this as a real blow to Google since this payments was one market where it really had a good opportunity to leverage its position and relationships with the millions of AdWords advertisers to give PayPal a good fight. There are certainly a lot of merchants (myself included) who would love to have an alternative to PayPal.

Meanwhile, eBay thinks it can double the size of PayPal by 2011, which would mean $100bn to $120bn in transactions processed. If successful in achieving that goal, eBay would see an additional $4-5bn in revenue in 2011 from PayPal. I’m sure executives at Google wouldn’t sneeze at that type of additional revenue today. Unfortunately it won’t be coming from Checkout.