In a society that's become increasingly paperless, the move to make it plastic-less is now well underway. Small-scale credit, which began with Paypal, is now being extended at some of the Internet’s foremost retailers. And it could be a real boon during an ongoing credit crunch.

The online-credit trend made major inroads late last year, when eBay, who bought PayPal in 2002 for $1.5 billion, had purchased Bill Me Later for $945 million. While Bill Me Later was not a conventional financial institution, they extended credit through CIT Bank of Salt Lake City to its customers, who can use the service at more than 1,000 online stores, including eBay (EBAY), Wal-Mart (WMT), Overstock.com (OSTK), and Hotels.com. A secure payment method not requiring a credit card, Bill Me Later is part of a growing phenomenon.

While the eBay acquisition made Bill Me Later a player in online retail, some other big companies recently entered the fray with their own alternative transaction methods. Most recently, America’s largest online retailer, Amazon (AMZN), replaced Bill Me Later with their own proprietary technology - the Flexible Payments Service (FPS). FPS is now available to third-party retailers, who can use it to complete customer transactions.

Google’s (GOOG) version, Google Checkout (or GC), has had trouble gaining traction. The service, which allows consumers to complete transactions at multiple sites via their Google accounts, saw only 1% growth in 2008; Bill Me Later flourished. GC’s growth was undoubtedly hampered by eBay’s decision to ban it from its site - a move that ruffled more than a few feathers.

With banks cutting back on credit limits, Bill Me Later has helped fill the void. After granting or denying credit in a matter of seconds, Bill Me Later is then able to more closely monitor customers with fewer charges and lower operating costs - since the vast majority of its users pay their bills online.

But the credit crunch hasn’t left Bill Me Later completely untouched. During the company’s recent fourth-quarter earnings call, Bill Me Later revealed it would be imposing tougher restrictions on how it extends credit due to an increase in non-payment. The service is also dependent on the health of CIT (CIT).

But despite the restrictions, Bill Me Later still surpassed industry king PayPal’s market share in a 2008 Rosetta survey of the 100 biggest online retailers. That makes it the new leader in an online industry that grew 23% last year. 

Perhaps the struggling big-bank credit market could learn a thing or 2.