Smartphones have opened up the possibility of turning mobile devices into virtual wallets. And today, PayPal has made a big land grab for mobile payments with its new iPhone app.

In addition to making it easier to send and receive payments from a mobile device, the app uses Bump Technologies to let users share money instantly by touching phones. With more companies getting into mobile payments all the time, this could go a long way to help PayPal retain digital payment dominance. But there’s one clear reason this won’t replace cash.

Free to download, PayPal’s new app gives users an easy to way to share restaurant bills, calculate tax and tip and view their payment history. But the Bump integration is the most interesting feature. Bump allows users to share contact information between nearby phones. For those concerned about bumping into a random stranger and sending them money from your pocket, it’s not that easy to Bump a payment. Users have to have the PayPal app open and request to send or receive money. 

But making it so easy to swap funds is a great move by PayPal. More companies are getting into mobile payments all the time. Leading the forefront right now is Square. Led by Twitter’s Jack Dorsey, Square is a tiny device that attaches to the iPhone and allows users to accept credit card payments. 

Aside from the fact that users need a special device to use it, Square is a new service that still has to overcome consumer distrust of the medium. Handing your credit card off to someone else can be
sketchy. If you’ve never heard of Square, that little white box
attached to a phone could be disturbing. At a recent charity even I attended, people who didn’t have previous knowledge of the company were a very hard sell for mobile donations. And that makes sense, it’s not apparent where your
credit card information goes or whether your credit card number is then stored somewhere on the Square enabled phone.

PayPal offers mobile payments from a trusted service provider. And while scanning your credit card is a step up from having to type in the number, PayPal offers an even better upgrade — not having to use a card at all.

That payment option is going to be incredibly appealing to consumers — and businesses alike. Already, retailers are getting into the business of mobile payments. This fall, Starbucks launched an app that lets consumers upload gift cards to their phones for mobile payment at the coffee counter

That actually is one of the inhibitors to wide spread usage of PayPal as a mobile payment device. Starbucks gets to keep all of the money that consumers spend on its gift cards. If businesses can figure out a way to do mobile payments on their own, they’ll save a lot of money.

Both Square and PayPal take a cut of of the money that gets paid through their services. PayPal takes a percentage of every transaction. It’s free to send money with a bank account, but credit card payments are subject to a fee executed by PayPal. Meanwhile, if users want to access the money they’ve been paid through the service, PayPal also takes a cut — usually 2.9%.

PayPal has an advantage when it comes to mobile payments because people trust the company with their money. 80 million people use PayPal’s website and 200 million are registered. And those numbers are growing. As The New York Times notes, PayPal’s mobile transactions climbed from 24 million in
2008 to 140 million in 2009.

Facebook acknowledged earlier this month with its own PayPal
integration, offering PayPal as a payment option is an easy way to get people to spend money in a digital environment.

But as long as people have to pay a fee to access money they’ve been paid with a mobile phone, rumors of this sort of thing replacing cash will be highly exaggerated.

Image: PayPal