PayPal and Google discuss mobile payments

PayPal is said to be in talks to embed its payment engine into Google's Android operating system.

PayPal is reported to be looking at the micropayments market, and trying to find a better way to process smaller payments.

A deal could mean substantial extra business for eBay's subsidiary. Analyst firm Gartner estimates that worldwide sales of smartphone apps will amount to $6 billion by the end of this year. With Android gaining increasing market share, the benefits for PayPal could be substantial.

For Google, working with PayPal, allowing it to compete more actively with other mobile commerce services, including Apple's iTunes store.

One area the companies could target is online gaming. Publishers are generating additional income by selling virtual items for use in the games they sell. Small payments for super guns or food for livestock, depending on the game, can amount to quite a healthy revenue stream.

At the moment these small payments are handled by purchasing a supply of credits for each game and topping up as each runs out. Services such as PayPal could smooth this cash flow by providing a central micropayment bank for online games. The service could also provide a virtual bank to pay for apps and other services.

With talks not yet confirmed, it is not known when or if these services will be made available but sources close to the companies believe a commercial service could start in late 2010.