(Updates to explain “secure element” issue. Changes in bold in paragraphs 10, 11)

Online payments firm PayPal is so keen to get mobile payments off the ground it has taken the unusual step of opening a Manhattan dummy store that demos how the app can be used (pictured at right).

It’s  idea is to demonstrate the application to merchants at the “store” between now and February.

PayPal’s head of mobile payments, Laura Chambers, said merchants have given a “very enthusiastic” response to PayPal’s plans for the wallet launch next year. The eBay unit  promises to reveal a pilot merchant partner by year end.  But Chambers was not ready to name any merchants or even any retail sectors that are interested in supporting the app in an interview at the downtown showcase.

In the meantime it will finally launch a PayPal app for Android phones that lets users tap their phones together to exchange money. The app, which the company already showed off as early as June this year, uses a peer-to-peer version of Near Field Communication, a short range wireless technology.