At present Android users can pay for apps using Google's Checkout service or a credit card.
"It's clear that PayPal has been making huge strides in mobile," Maribel Lopez, from Lopez Research, told Bloomberg.
"From Google's perspective, they just haven't won the war on this. Why bother fighting it?"
Both Google and PayPal declined to comment on the report.
The news comes just weeks after Nielsen revealed that more handsets running Google Android than Apple iPhones were sold in the first quarter of 2010 in the US.