PayPal, noting the massive hole in the Android ecosystem is today launching “Mobile Payments Library for Android” to scratch that very itch. It works just the way that you would want it to, with purchases being handled inside of the application, minimizing the effort required to allow for a payment. Developers get to dodge handling credit cards, and users are allowed to use a payment processor they trust, a good functionality mix.
For the developer operating on a shoestring, the ability to juice a few more dollars out of applications is a veritable godsend. It would be better if Google had gone ahead and built similar capabilities into Android natively, but this stopgap is more than sufficient for the time being.
Even more, if Google was to build native in-app purchasing capability it would be dependent on Google Checkout. Given the relatively lower market penetration of Google Checkout, the late PayPal option might actually be a boon for developers. Android is just now catching up to the iPhone platform, where in-app purchases have been an option for more than a year.
More details of the library and how to use it can be found at X.com, where PayPal has a wealth of information on just how to put it to work.