Start-up Confinity Inc. hopes to become a financial services powerhouse by pioneering an inexpensive new way to move money: wireless cash.

"[The company] may have a handle on something quite good," says Robert Sterling, an analyst at Jupiter Communications, based in New York.

Headquartered in Palo Alto, Calif., 19-person Confinity is getting ready to launch its flagship product, PayPal, sometime in the next few weeks. The product consists of free software that users can install in their PalmPilot personal digital assistant or any other PDA that uses the Windows CE operating system.

Once the software is installed, PDA owners can use their device’s infrared port to exchange cash with one another or pay bills at locations equipped with an infrared reader.

"It’s a new twist on the idea of a digital wallet," says Blaine Mathieu, an analyst at Dataquest, based in San Jose, Calif. "Only this time, it’s a digital wallet you can take with you that don’t have to pre-fund. Those are very important features."

Check out Confinity's PayPal

A number of companies have tried, mostly without success, to popularize so-called digital wallets. One of the earliest, Reston, Va.-based CyberCash Inc. {CYCH}, for example, recently announced the termination of its CyberCoin service, which forwarded online payments to vendors from accounts pre-funded by the company’s customers.

"Requiring payments in advance turned a lot of people off" Sterling says. "People like to pay for goods when they’re purchased, not before."

Confinity’s technology will allow consumers to do just that. When the service is activated, PayPal users will register their checking or credit card accounts through the company’s Web site. Debits are then entered against those checking or credit card accounts only after a PDA owner uses the free service.

"We expect to make our money off the float," says Luke Nosek, Confinity’s vice president of marketing.

If the user draws funds against a credit card, Confinity pays the 2 to 3 percent processing fee credit card companies traditionally charge merchants for handling a sale.

"Fortunately, we only have to pay that fee once," Nosek says. "After that, the money can be moved from one device to another without any cost to us."

A PayPal user might, for example, use her PDA to beam her share of a lunch tab to a colleague with an infrared-equipped PDA. At the moment she executes the command, the money is drawn from the account she previously designated and placed in the PayPal account in her lunch partner’s PDA. If the recipient doesn’t already have a PayPal account, the software required to accept payments can also be quickly transmitted in the same fashion.

"It’s the word-of-mouth, viral technique that has proven popular with other PalmPilot software," Sterling says. "Palm users tend to exist in clusters. They often tell each other about new ways to use them."

Recipients of PayPal wireless payments can then have the funds transferred into their checking accounts at the PayPal.com Web site or, as the company hopes, keep at least some of it in their own PDAs to make future payments.

"That’s the key to our strategy," Nosek says. "If you look at the traveler’s check business, for example, 10 to 15 percent of the people who buy them never cash them in. We’d be happy if the same thing happened to us."

Sterling says Confinity could build a very profitable enterprise by handling other people’s money. "If you have a business and you can get people to give you money without expecting anything in return immediately, that’s a good business," he says.

There are about three to four million PDAs in circulation that can make use of the PayPal software.

But Nosek is quick to point out that PDA users are only the initial target market. "By 2003, there will be one billion Internet-enabled cell phones," he says, citing figures from Dataquest and telecommunications-supplier Ericsson {ERICY}. "Our system will also work on those phones, as well."

Confinity was started in December 1998 by a team of veteran Internet and financial services entrepreneurs. The company has received about $5 million in venture capital from a group of investors that includes Nokia Corp.’s {NOK} Venture fund, Nokia Ventures, Deutsche Bank, and Bell Melton, the founder of CyberCash. At least one more round of private venture capital funding is anticipated before Confinity’s founders contemplate an IPO or sale to another company.

"We’re focused on building our business," Nosek says.

According to the company, several thousand people have already registered to download the PayPal software, which hasn’t yet been released.

Confinity faces competition from several pre-existing Web-based digital-wallet companies such as Seattle-based Qpass.com Inc. and CyberCash, which has recently changed strategy to eliminate pre-payments.

Unlike those companies, though, Confinity is focused strictly on the wireless market, rather than on helping consumers make online purchases through their PCs.

Check out Qpass.com

"In the future, there will be many more Internet-connected wireless devices than Internet-connected PCs," Nosek says. "We’re targeting the part of the market with the most rapid growth."

Analysts say Confinity’s future will likely be determined rather quickly.

"They have a very narrow window of opportunity," says Mathieu, who says the company will probably soon face a raft of new competitors, such as wireless carriers. "But if they can build a tremendous amount of users in the next six months, they can become the de-facto standard."

Sterling agrees that timing is critical but adds that moving too fast could be as deadly as moving too slowly. "Confinity is well-positioned for the future," he says. "But you can find plenty of companies that are well-positioned too early."