Max Levchin, both guns blazing, was killing people left and right while his PR man rolled his eyes. We were in the lunchroom at X.com in Palo Alto, California, and Max was playing a shoot 'em up arcade game called Area 51. Max LOVES Area 51. He is very good at it, standing calmly, blowing to bits anything thrown at him, his eyes half-closed as if in a homicidal trance. "What are people going to think?" groaned the PR man. "People trust us with their money here. When people think of money, they think of banks built of marble and cherry wood, not Max Levchin in parachute pants killing people."

Funny, I hadn't noticed the parachute pants, but it was a good detail. And Max Levchin killed on. It's hard to think of him as the founder of the next CitiCorp, but that's what I believe he is.

Max, who is 25 years old and working for his fourth Internet startup company, is Chief Technical Officer at X.com. And X.com, while it sure sounds to me like a great place to find dirty pictures online, is actually a financial services site on the World Wide Web. X.com's claim to fame is PayPal, an Internet payment system built by this same mass-murdering Max Levchin. Since it was launched last Fall, PayPal has become the payment system of choice for 3.3 million web surfers, many of whom use it to buy and sell things on eBay and other auction sites.

When PayPal (not yet X.com) was organized in January 1999, it wasn't a particularly auspicious time to start a micropayment system, or any payment system for that matter. Just about anybody who tried to build such a thing had already failed. Digicash had come and gone, First Virtual was reinventing itself, as was Cybercash. The thing they had all tried to do was laudable — find a way for Internet users to pay for transactions that cost too little for credit card companies to be bothered with. The credit card low limit for Internet transactions seemed to be around a buck. If you wanted to sell something that cost less than a buck, you simply needed a different system. And that's fine, except that not enough people used the different systems that were proposed.

And then came Max Levchin and PayPal. Max, who is a very bright, very articulate kid who immigrated nine years ago from the Ukraine and speaks better English than I do, fits the Silicon Valley model better than does PayPal. Max lives in an apartment with no furniture, drives a $57,000 sports car, and has a mother back in Chicago who fears (she doesn't know for sure) that her son is a failure because he doesn't have a Ph.D. or even a masters degree. PayPal, on the other hand, just shifts around dollars and cents from one person to another. Dollars and cents, not cyberunits or beanz or flooz or the currency my friend Ted Nelson wants us all to use, flecks.

Max and Peter Thiel, his PayPal co-founder, started with the simple idea that people preferred plain old dollars. Max and Peter's original idea was that people ought to be able to beam money to each other using the infra-red networking capability in their Palm Pilots. Only not everyone has a Palm Pilot. Beaming was clever, but e-mailing was brilliant. The next step of PayPal evolution was allowing anyone with an e-mail address to send money to anyone else with an e-mail address. That's 135 million potential payees in the U.S. alone.

PayPal's use of plain old dollars and its ability to send money to anyone with an e-mail address set it apart from the earlier payment systems. To that point people had to get together and agree on what system they would use for payment, then both had to be registered for anything much to happen. PayPal took more of the Western Union approach — that if you were told that some money was waiting for you down at the Western Union office, you'd find a way to hike down there and get it. For PayPal recipients, hiking down means registering as users. It's free. It's actually better than free since full registration scores you a five-dollar bonus, as well as another five-dollar bonus to whomever refers you or is the first to pay you using the system. And that's how PayPal actually began operations last October — with 24 employees sending small gifts of money to their friends.

So PayPal doesn't require that the recipient pre-register. But that's not all. PayPal effectively allows any registered user to accept credit card payments from any other registered user. That also made PayPal the first system, other than I suppose Western Union, that allowed users to send cash from their credit card accounts. The way this all works is that you link a credit card or bank account or a bunch of credit cards and a bunch of bank accounts to your PayPal account, and direct payments from and to any linked account you like. And it is all free.

So how does PayPal make money? Initially, it's from the float, from interest earned on your money sitting unused in PayPal accounts. Today, that volume stands at around $40 million and rising. Now the daily interest on $40 million isn't enough to support PayPal's 400 employees. But imagine how those numbers will change as more users are added, and if those users can be convinced to let their PayPal money stay put, rather than shifting it into a credit card or bank account. It wouldn't take significantly more X.com employees to handle 10 million users with an average balance of $1500 ($3 billion in daily float) than it does to keep track of the current $40 million.

Almost from the start, PayPal had competitors and imitators, but only one — X.com — had significant market share. So the two companies merged last March, taking the X.com corporate name and the PayPal product name. The combined company has more than 80 percent market share. X.com brought financial services know-how into the mix, and that's exactly where PayPal is headed. Anything you can do at a bank you'll eventually be able to do over the Internet through PayPal. Shaded parts of the Web site use words like "interest," and if that interest is better than a bank's, expect PayPal account balances to balloon.

This creates an interesting kind of hybrid money company. X.com handles micropayments, for example, which the banks and credit card companies don't want to touch. PayPal can do what they won't do because Max and Peter knew that people who pay a few cents for a stock quote over the Internet aren't likely to do it once, but dozens of times. Micropayments add up if they are aggregated in a PayPal account. Within the PayPal account, activity is effortless and pretty much free. It's only when the money is shifted to a bank or credit card that there is any real expense. This is where PayPal got it, and the earlier micropayment schemes, for the most part, didn't.

I think PayPal, which is still privately held, is going to be an incredible and enduring success. The proof lies in those 3.3 million users acquired in only 10 months. Applying a little high school calculus and business rules of thumb to that adoption curve shows two interesting things. One thing it shows is that there is a number of users, beyond which, PayPal is pretty much unassailable as the de facto Internet payment system. That number, according to X.com's calculations and mine, is 10 million registered users. Then there is the question of whether, having already achieved 3.3 million users, PayPal will make it to 10 million. By taking the first and second derivatives of that adoption curve, I know they will make it to 10 million users and beyond. According to the numbers, this game is already over, and X.com's PayPal is the winner.

And no, I don't have any financial interest in X.com. I wish I did.