The next Xbox 360 update will have paypal functionality built in.
Major Nelson who works on the Xbox team, has tweeted the following:
New Xbox 360 System update brings expanded PayPal functionality
We will keep this post updated as we get more information.
Edit: This new update will work as a billing option letting users purchase any Xbox 360 products like Microsoft Points, Xbox LIVE Gold subscriptions and Games on Demand titles. The update will also enable Xbox 360’s to auto standby if the system is idle for more than an hour.
Stay tuned with GamingBolt for more news and updates.