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(Adds comments from Stripe CEO, background)
By Deepa Seetharaman
SAN FRANCISCO, June 24 (Reuters) - Startup Stripe and China's Alipay have struck a deal to allow Chinese buyers to pay for purchases on the U.S. service, in a rare agreement between a Western payments service and the Alibaba IPO-ALIB.N affiliate.
Alipay, once part of Chinese e-commerce giant Alibaba before it was split off, handles about half of all online transactions in China. Stripe said the deal will let its own customers more easily handle purchases from the world's second largest economy.
Stripe, which is often compared to Ebay Inc's PayPal, said few of the credit card brands it supports are used in China. It decided to add support for Alipay to bridge the gap between Chinese consumers and the businesses whose payments it handles.
"I don't think the people realize the extent to which the Internet economy is balkanized," Stripe President and Co-founder John Collison said in an interview.
Currently most businesses can accept online payments from just a minority of the world's population, Collison added. "What we've been focusing on this year has been making Stripe work really well for global businesses."
Alipay users can now enter their email address and a six-digit SMS code to buy things from companies that use Stripe to process payments, rather than be bounced to another site.
But payments is just one challenge for companies looking to sell goods around the world. Another is the complicated and time time-consuming process of getting physical goods to consumers in places like China, India and Brazil.
"That is something we have heard from our merchants," Collison said, of these logistical challenges. "Maybe some day we will end up doing something there. That's one of the big challenges for them."
The startup raised $80 million in January from venture capital investors in a deal that values Stripe at a hefty $1.75 billion. Since January, it has grown from 90 people to 130.
The transaction puts Stripe in the rarefied company of startups valued at more than $1 billion just three years after brothers Patrick and John Collison debuted their service.
Stripe's clients have included ridesharing service Lyft and the Museum of Modern Art in New York. Its institutional investors include Sequoia Capital, General Catalyst Partners and Khosla Ventures.
Stripe is also backed by three of PayPal's co-founders: venture capitalist Peter Thiel, Tesla Motors Inc CEO Elon Musk and Max Levchin, who recently raised $45 million for his latest startup Affirm, which extends financing to shoppers in a matter of seconds. (Reporting by San Francisco newsroom; Editing by Sofina Mirza-Reid and Diane Craft)