Ever since PayPal burst on to the scene, the Nostradamus types have been predicting one PayPal killer after another. First it was "e-gold," then Western Union, then C2IT (by Citibank), then Google. None of these players have put a dent in PayPal, and in fact more than a few of them have gone the way of the dodo. Even Google Checkout is having problems these days.

The space is about to get much more competitive now that Microsoft has announced their plans to build a micropayment service with a twist. The killer feature? The Redmond giant apparently wants to take on Visa and MasterCard, among others.

Speaking at the World Economic Forum in Davos, Switzerland, Bill Gates indicated that Microsoft was looking into finding a way to make so-called micropayments a reality online. And to make it a reality, Gates noted that traditional credit card fees would need to be undercut, and severely. See, the credit industry makes money not only off interest, but they also scoop up 2.75% + $0.35 in fees for most transactions (on average). As you can see, this makes charging for inexpensive items quite unattractive; a $0.25 charge would be instantly doubled on account of fees. For people who have fantasies of selling web content by the page, this is unworkable.

The question is, how can Microsoft pull this off? The DOW Jones newswire quotes Gates as saying, "If you want to charge somebody $0.10 or $1 a month, that will just be a click... you won't have to manage some funny thing or pay some big credit charge, where half of it goes to the clearing."

Microsoft has two options. First, Microsoft could expand its "Points" system, which earned notoriety with the Xbox Live Marketplace (and was later tapped for the the Zune Marketplace). Such a scheme would see users buying points in bulk and then paying for items with said points. It's a virtual currency ecosystem of sorts based on a fixed "exchange rate" between real currency and the points system. This is not Microsoft's only option, of course. Instead of points, Microsoft could simply borrow a page from PayPal and deal in real currency. I'd recommend that the company do the latter, because "points" are not popular with the early-adopter crowd. They obfuscate the real cost of things, and many users have reservations about buying large amounts of "points" that then sit somewhere, unused.

What will Microsoft do? That remains unclear, although Gates' comments make it clear that the system will be open to third parties for integration, meaning that retailers and site operators should be able to plug into the payment system via an APIa must-have feature for any payment system. Gates' plans would also mean that Microsoft's system will undercut PayPal as well. PayPal charges between 1.9% and 2.9% plus $0.30 on transactions, and thus is unsuitable for micropayments. Microsoft's cut of any such system would need to be considerably less than that to make micropayments work. The upside to this, of course, is that small transaction fees could also apply to larger purchases, which could eventually see Microsoft encroaching on the turf of existing regular transaction processors, including PayPal and the credit card guys.

I'm cautiously optimistic for Microsoft's solution, but when you think back to Passport or even Microsoft Wallet, you know that there are plenty of opportunities for the project to go awry. Still, I can't help but think that anything that puts pressure on credit card fees is a good thing.