Terms of the deal were not revealed for the startup that has a platform that companies can use to build their own branded mobile payment and loyalty apps.
Several well-known companies use Paydiant's technology, including Subway and Capital One. It has also been adopted by the Merchant Customer Exchange, a group of major retailers including Target, CVS and Wal-Mart that is developing a mobile payment app called CurrentC to take on Apple Pay.
Paydiant's payment technology allows people to pay for items by using either NFC (near field communication) or a QR code, which is scanned at checkout. To pay with NFC, which is also used by Apple Pay, people hold their mobile devices near a special sales terminal that can read the embedded NFC chip. However, some merchants have said they are reluctant to invest in new payment terminals that support NFC payments.
PayPal, which is getting spun off from parent company eBay later this year, will face increased competition in the mobile payment market. While Apple's contactless payment system has received much attention since it launched in October, other large tech companies are building their own products.
Last Monday, Google announced that Verizon, AT&T and T-Mobile will begin pre-installing Google Wallet, the search giant's contactless payment system, on new Android smartphones later this year. As part of that deal, Google will also acquire some technology from Softcard, a competing mobile wallet app developed by the carriers.
In February, Samsung purchased mobile wallet company LoopPay and is incorporating its technology into the Galaxy 6S and Galaxy 6S Edge smartphones. Instead of using NFC to make purchases, LoopPay's technology generates magnetic fields that simulate those created by a credit card's magnetic strip, essentially making any terminal capable of receiving mobile payments without modification.
The deal is subject to standard closing conditions like regulatory approval procedures, but PayPal expects to finalize the purchase in late March or April.
PayPal also said on Monday it will start selling an NFC-equipped version of its credit card reader so merchants can process contactless payment transactions that use the technology.