(Updates with additional details on partners, mobile payments and transaction fees.)

By Scott Morrison

Of DOW JONES NEWSWIRES

SAN FRANCISCO -(Dow Jones)- EBay Inc.'s (EBAY) PayPal unit on Tuesday launched new technology that makes it easier for third-party software developers to fold the online payments system into their own applications.

The move comes as the Internet commerce giant looks to the PayPal unit to serve as a key growth driver, while eBay works to make much-needed changes to its core marketplaces business--and as PayPal faces looming competition from some of the Web's biggest names.

EBay Chief Executive John Donahoe said the new system would drive a bold new wave of innovation in online payments, adding that it was designed to "disrupt ourselves before others disrupt us."

The new system, called PayPal X, will enable users to make purchases while they are still inside an application, such as an online game. Users wishing to make a PayPal purchase had until now been required to open a new window or navigate away from their game to make purchases with PayPal.

PayPal X, which the company has previously touted, was unveiled at a developers conference in San Francisco. Companies testing PayPal X include small Silicon Valley startups like PlaySpan Inc., which has developed an in-game virtual goods commerce and micropayment platform, as well as German enterprise software giant SAP AG (SAP) and Sun Microsystems Inc. (JAVA), which has agreed to be acquired by Oracle Corp. (ORCL).

PayPal said the system also works with mobile applications, which will make it easier for people to make purchases with their cell phones.

"Customers are expecting us to be available in a lot more places," said Osama Bedier, PayPal's vice president for platforms.

The company also introduced a pricing plan for developers who build applications targeting markets traditionally served by cash or checks, such as rent or payroll payments. Those fees, 50 cents or 0.75% of the value of the transaction based on the speed of settlement, are much lower than PayPal's standard fee of 2.9% plus 30 cents.

The moves come as PayPal faces growing competition in the lucrative online payments business from some of the largest Internet names.

Over the past year, Amazon.com Inc. (AMZN) has been rolling out technology that lets other retailers use its proprietary system, known as Checkout by Amazon, an effort designed to draw more retailers into the company's network. Facebook has in recent months gradually expanded the scope of its nascent online currency system, a move that suggests the massive social network aims to build an online payments business that could one day augment its advertising revenue.

Meanwhile, Google Inc. (GOOG) has been trying to expand uses of its Google Checkout payment service, offering it as the payment option for developers who want to sell mobile applications for its Android operating system.

One PayPal partner, a startup called Payvment, has developed software that allows people to sell items on Facebook. Bedier rejected suggestions that Facebook was a competitor in online payments.

"We don't see it as competition," said Bedier. "We are trying to solve the same problem."

EBay said earlier this year that it expects PayPal to be a key growth driver for the company over the next several years. EBay has said it expects PayPal to increase revenue to a range of $4 billion to $5 billion in 2011, up from $2.4 billion in 2008, driven by continued penetration on eBay, strong growth off of eBay through its merchant services business and expansion into mobile and non-retail payments.

Shares in eBay were recently up 0.2% at $22.49.

-By Scott Morrison, Dow Jones Newswires; (415) 765-6118; scott.morrison@dowjones.com

(END) Dow Jones Newswires

11-03-09 1616ET