The bill for lunch arrives, but you've left your wallet in the car. Your lunchmate doesn't want to pick up the tab. So she pulls out her Palm III, beams you a little program called PayPal, and suggests you beam back your share of the bill. Later that day, the cash comes out of your account and drops into hers.

That scenario should be a reality by September, when Confinity, a Palo Alto, California software start-up, launches PayPal, an application that will allow individuals to "beam" sums of money between handheld devices such as mobile phones, Palm Pilots, and pagers.

"All these devices will become one day just like your wallet," said Confinity CEO Peter Thiel. "Every one of your friends will become like a virtual, miniature ATM."

In Thiel's case, though, it's a pretty fat wallet.

Last week at PayPal's launch party, venture capital firm Nokia Ventures used the software to beam US$3 million to Confinity through Thiel's Palm Pilot. The whole process took about five seconds.

Thiel said consumers will register a credit card number at the PayPal Web site, download the small application, and choose a PIN number.

Sending a payment involves entering in the amount into the Palm and transferring it to another with the "beam" function. The device figures out who the recipient and sender are, and the next time the sender logs on to PayPal's site the payment is processed.

The company's business model relies on this "infrared distribution" to spread the application itself across Silicon Valley and beyond.

And if the recipient lacks the PayPal application, the sender can beam that over, too. That, says Thiel, is actually part of the business plan for spreading the application widely.

Americans have so far been reluctant to use online electronic wallet programs or microchip-embedded smartcards, although the latter are popular in Europe.

Thiel says he is confident PayPal will succeed because the program allows individuals to make payments to each other, not just to retailers or financial institutions.

"Most transactions take place between people in the real world, away from the desktop," he said.

The money involved in the transactions will be handled by Merrill Lynch in an escrow account; the interest earned by the account will go to Confinity.

"Part of our business model is to capture the float," says Thiel. Once Confinity establishes a trustworthy reputation, he says, he expects many people will also choose to pay Confinity directly by check or transfer to preload their PayPal account, rather than adding the extra step of going through a credit card.

Concerns about security have also hampered the growth of digital transactions, but PayPal relies on the work of two renowned cryptologists.

Stanford University professors Dan Boneh and Martin Hellman helped develop the application. Hellman, who along with Whit Diffie invented public key cryptography, is also an investor.

Thiel says PayPal uses elliptical curve cryptography, a type specially developed for small devices.

Because PayPal uses strong encryption, Confinity is obliged to apply for an export license from the US government to offer the program outside the United States. The company hopes to market PayPal in Europe.