"PayPal Here" -- as the service is called -- will provide a free, triangle-shaped card reader and mobile application to small merchants.

That gadget, sometimes referred to as a dongle, plugs into the top of mobile devices like Apple Inc iPhones and, soon, Google Inc Android smart phones, allowing merchants to take payments through these gadgets on the go.

PayPal charges a fee of 2.7 percent of the purchase price for all types of credit and debit cards -- including those issued by American Express Co ; transaction fees for processing AmEx cards are often higher on other services. That compares with the 2.75 percent charged by Square.

PayPal is a dominant online payment processor, but the company is trying to expand into the physical world. It has a point of sale service that it hopes big retailers will use in thousands of stores. Now it is going after much smaller mechants with the new swipe device.

The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010, according to research and advisory firm Aite Group.

The market for mobile card acceptance by small businesses and individual merchants is probably about $4 billion currently, but it is growing fast, Rick Oglesby of Aite Group said.

Square, started in 2009 by Twitter founder Jack Dorsey, leads this niche of the mobile payments market, according to Oglesby.

Square is known for its own square-shaped card reader that attaches to the top of iPhones and other mobile devices. It has been a hit among small merchants, such as cab drivers.

The company is now processing more than $4 billion in payments a year and over 1 million people accept credit cards through its dongle. Visa Inc bought a stake in Square last year.

Intuit Inc, known for its accounting software, launched a mobile payment service for small businesses called GoPayment in May 2009 and unveiled a free version in early 2011 that came with a free card reading device.

GoPayment is about half the size of Square, Oglesby estimated.

"About 1.5 million small merchants are using these dongles now," he said.

PayPal has a good chance of grabbing some of the millions of small merchants who still do not accept credit and debit cards, Oglesby added.

"It's a big market and it's growing very rapidly," he said. "Most providers think there are 17 to 20 million small businesses in the U.S. that are not accepting cards."

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