Jumio’s breakthrough “NetSwipe” payment processing technology that transforms any webcam into a credit card terminal, has the potential to threaten PayPal and emerging payment startups such as Square.

With NetSwipe customers simply show their card to the video camera on their smart phones, laptops, desktops, or anything with an Internet connected camera. It takes just seconds for the Jumio service to read the information on the card, check for fraud, and complete a payment.

Daniel Mattes, founder of Jumio, says that video scanning improves security and reduces fraud risk, which leads to lower processing costs for merchants. Payments can be accepted through any Internet connected camera: smart phone, laptop, desktop, or tablet.

While that’s an impressive feature, it is Jumio’s ambitions to extend credit card processing capabilities to small vendors and individuals, where the company has huge opportunities to grow quickly.

EBay’s PayPal is clearly in Jumio’s cross-hairs. The payments giant grew quickly because it offered a secure way for small merchants and individuals to accept payments without the need for a credit card merchant account. However, PayPal faced huge challenges in its early years because it was losing millions of dollars to fraud.

To guard against fraud Jumio has built two large AI networks to bolster its security. These neural networks teach themselves about fraud and its many mechanisms, from millions of examples fed over a several month test period. And further, real world examples will strengthen the security over time. It’s this AI that makes Jumio’s video scanning technology so effective at weeding out fraudsters and also so quick to process payments.

“Our scanning technology is very good, it can easily detect the material of the card, it can see if the letters are embossed, or if it’s made from metal, or if it’s a photo,” says Mr. Mattes.

He points out that it’s far easier to scam others through online methods than it is if an actual credit card has to be used. This greatly reduces the risk of fraud and that leads to far lower processing fees.

The video scanning technology was acquired from two Israeli engineers and further refined by Jumio’s development teams in Austria.

Mr. Mattes is a serial entrepreneur, he co-founded Jajah in 2005, a very successful Austrian telephony startup, which sold to Telefonica in late 2009 for $270 million.

When I first met with Mr. Mattes in San Francisco, in the fall of 2010, he said that Jumio would launch in January 2011. However, he says that it took quite a bit longer to perfect the video technology.

In the meantime, Jumio snagged a high profile investor: Eduardo Saverin, a co-founder of Facebook, who led a $6.5 million Series A in March.

The key to Jumio’s success will be its ability to quickly sign up merchants, including those with credit card merchant accounts. Mr. Mattes believes that his system can shave as much as $3 in every $100 from credit card processing costs. That’s a significant margin for any size merchant and five large retailers will be joining Jumio’s roll out — the announcement will come later. They will license the technology and integrate it with their current payment systems.

PayPal, and emerging startups such as Square, with its hardware dongle that reads credit cards into a smart phone, are among those that are clearly vulnerable to Jumio’s ambitions.

As with PayPal, individuals will be able to use Jumio. For example, garage sales, or even collecting money from a friend. “We give you a link and we will process the credit card for you,” says Mr. Mattes.

If Jumio is successful, it will also give a huge boost to the credit card and extend its reach into massive new markets where it couldn’t be used for fear of fraud or there was no infrastructure to support credit cards.

While Jumio is confident that its security systems are solid the true test starts today, as it accepts the first merchants and begins to roll out its payments system — and takes on the inevitable armies of online fraudsters that will probe for cracks and holes.

As I said last year, Jumio is easily one of the most fascinating startups I’ve come across in a good while. I’ll be watching closely.

[Cross-posted at Silicon Valley Watcher]