01/06/2012 05:14 pm ET Updated Mar 07, 2012

PayPal, Home Depot Experiment Brings In-Store Payments To Retailer

* Pilot program running at five Home Depot stores

* Test involves "small number" of PayPal staff

* Move pits PayPal against Visa, MasterCard

(Adds background and analyst comments)

By Alistair Barr

Jan 6 (Reuters) - EBay Inc's PayPal unit is testing in-store payments with Home Depot, one of the largest retailers in the United States, as the online payments provider moves to expand into the physical world of brick and mortar.

A pilot program for PayPal's new point-of-sale, or POS, technologies is being run in five Home Depot stores and involves a "small number" of PayPal employees, PayPal spokesman Anuj Nayar said.

PayPal is a dominant player in online payments, with over 100 million users. But the business is trying to expand into offline payments, a much larger market. The move pits the eBay unit against payments giants, including Visa Inc, MasterCard Inc and American Express Co.

In September, PayPal pitched its new in-store payments system to about 120 retailers, including Sports Authority, at an event in Los Angeles. EBay Chief Executive John Donahoe spoke about the initiative several times last year, but the company had not disclosed which retailers agreed to test it first.

While the Home Depot trial is small, Wall Street analysts are excited about the potential.

"We believe a full Home Depot roll out would increase PayPal's addressable market by more than 35 percent overnight," Gil Luria, an analyst at Wedbush, wrote in a note to investors on Friday.

"Although penetration would start at zero, we believe that by adding value to consumers and merchants, PayPal may eventually approach penetration rates comparable to its online presence." (Reporting by Alistair Barr; editing by Carol Bishopric and Andre Grenon)