Historians may well view 2006 as the year Google finally “jumped the shark” with the introduction of Google Checkout, its online payment processing service. “Checkout” is one of Google’s latest attempts to diversify itself beyond its core search business. Unfortunately, like other internally developed services Google has launched recently, Checkout has failed to take the world by storm and captured just 1% market share in March.

Google has aggressively tried to buy its way into the market dominated by eBay’s PayPal service since launching last summer. Google recently reported spending nearly $60 million at the end of last year to promote Checkout, mostly in the form of coupons offered to consumers to give it a spin. In addition, Google cracked open its war chest a bit further to attract retailers by waving all processing fees through the end of 2007.

Google now includes a Checkout icon next to partners’ sponsored search listings which are not-so-subtly intended to influence which ads consumers click on. While a few name brand retailers have signed on, most of those teaming with Checkout have been small retailers that are largely dependent on search traffic.

For all its marketing muscle, Google has yet to make a compelling case to consumers as to why Checkout is even needed. Rival PayPal rocketed to success a decade ago by solving the problem of transferring money securely and conveniently between parties online, particularly on eBay. Checkout, on the other hand, seems more like a solution in desperate search of a problem. Google’s Checkout pitch, namely a service to help consumers shop with confidence and avoid receiving commercial spam seems oh so 1996.

Without a strong consumer valuation proposition, Checkout has been unable to make any headway against PayPal. The chart below shows Compete’s estimate of the number of monthly U.S. based transactions processed through Checkout, and its respective market share versus PayPal.

What did the $60 million buy Google? Not much. While Checkout processed nearly a million transactions and grabbed 4% market share in December, the coupons did not buy loyalty. Transactions have since settled near 250,000 a month, holding Checkout’s market share to just north of its pre holiday level. Viewed differently, in March, PayPal processed 68 transactions for every transaction processed by Google Checkout.

In addition, with few exceptions, consumers at Checkout’s largest retail partners are opting not to use Checkout now that the coupons have been scaled back. The table below shows the steady erosion in Checkout’s share of the total online transactions processed on these sites. On average, Google’s share of transactions across these sites had fallen to roughly 8% in March, down from 19% during the holidays.

Yahoo’s me too announcement last week that it is partnering with eBay to offer a PayPal Express checkout system to its partners is clearly a defensive move designed to stem the loss of ad dollars to Google. Yahoo and eBay shouldn’t lose much sleep yet. Google has its work cut out for it, and will likely need to crank open the coupon spigot even wider this year if is intends to gain much more than a toehold in this market.

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