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PayPal (s ebay), the online payment giant, has been working its way into physical stores and is now rolling out as a payment option in more than 2,000 Home Depot locations. The eBay division isn’t just targeting retail, however. It’s also making its debut in restaurants and bars with a new partnership with Tabbedout, an Austin, Texas start-up that lets people pay their tabs using an app.

Tabbedout users will be able to add PayPal as a payment option alongside existing choices for credit and debit cards. Users will still need to open a tab using a credit or debit card saved to their Tabbedout account when they enter a participating business. But when it comes time to settle up, they can enter in their email address and password to pay using PayPal. Tabbedout users can then just walk out without having to deal with a waiter.

I like Tabbedout because it addresses a specific use case for paying at restaurants and bars. While a lot of the talk in mobile payments has focused on retail and smaller merchants, there’s still a chance to make mobile payments a big reality in hospitality. Tabbedout, for its part, has done a lot of back-end work to integrate with eight point-of-sale systems that allow it to work in more than 70 percent of the establishments in the U.S., it claims. AisleBuyer and others have also tried to tackle some of this problem.

Tabbedout, however, is only available in about 400 locations across the country, so don’t expect to be able to use it in many places though SXSW visitors will get the first crack at it. PayPal integration will start in Austin before expanding to the rest of Tabbedout’s footprint. Tabbedout founder Rick Orr said PayPal integration has been the biggest request for consumers. He said with PayPal’s brand, the company expects to greatly expand the number of merchants it acquires this year. Tabbedout, which finalized a $5.7 million funding round last year, is also testing a new offers systems that allows merchants to offer discounts to Tabbedout users.

“The last two years has been used to establish integration; it’s a model that didn’t really exist before,” Orr said. “Now, we’re very excited to leverage PayPal’s 106 million users and secure online commerce systmen to bring payments into the offline world of bars and restaurants.”

The PayPal integration is interesting because it shows how the payment company is working to get into real physical locations. Its payment system usually doesn’t require hardware upgrades unlike many NFC-based systems. But it needs software integration to work with existing POS systems. PayPal has been striking deals with POS-terminal makers and software providers to get its in-store system up and running in retail locations. But Tabbedout has done much of the work already at restaurants, so it makes it a good partner for PayPal.

“We have a strong appreciation for the work required to get into the POS systems and we have no desire to replicate any of that ourselves,” said Scott Dunlap, VP of emerging opportunities for PayPal. “Tabbedout’s system is seamless and you can do offers and we just liked it and the fact that for merchant it’s so simple to get up to speed.”

I wonder if PayPal will ultimately just buy Tabbedout or eventually work around it to establish its own connections to restaurants and bars. It could just run it all through its PayPal app, which is already being envisioned as a way to pay at coffee shops and other small eateries. This would be a logical step as it looks to expand payments to the real world. If PayPal can connect into all manner of POS systems, it can move toward becoming a universal digital wallet. Dunlap declined to talk about potential acquisitions, but he said this is just part of a bigger expansion of PayPal’s offline ambitions.

PayPal should have made the move to offline payments a while ago. Instead, it has let companies like Square, Isis and Google (s goog) rise as big competitors. But PayPal seems to be putting the pieces together to make its online payment push a reality. Not everyone likes to use PayPal and some might find it less familiar to use in a real-world setting. But it’s making the investments and securing the deals it needs to be a big contender in mobile payments.

http://www.youtube.com/watch?v=ddxkrEKZxFM&list=PL5111A103917B279A&index=5&feature=plcp