SAN FRANCISCO -- Square's grand business plan just got a caffeinated jolt.

Inone of the largest mobile-payments rollouts yet, technology start-upSquare on Thursday said it has begun processing all credit cardtransactions at Starbucks' more than 7,000 U.S. storefronts. Next month,customers will be able to purchase coffee with Square's Wallet app, thecompanies say.

Starbucks also said it will enable digital tipping on its mobile-payment apps and on Square Wallet in the U.S. in summer 2013.

"We think we can redefine a Starbucks customers' experience," Square CEO Jack Dorsey told USA TODAY.

Dorsey,who invented Twitter, and Starbucks CEO Howard Schultz presented theplan at Starbucks' Leadership Conference in Houston, where more than10,000 Starbucks store managers were in attendance.

WithStarbucks, Square -- whose app is increasingly popular among smallbusinesses -- for the first time is wading into mobile payments forlarge multinational organizations. It plans to venture overseas nextyear through Starbucks, which has 18,000 stores in 60 countries.

Eventually,Starbucks' customers will be able to order and pay for drinks via theirsmartphone before they enter a store, says Adam Brotman, chief digitalofficer at Starbucks. Starbucks employees, in turn, would be able toprocess orders before a customer speaks, based on the informationcontained on their Square apps, he says.

"There are seismicchanges to (consumer) behavior because of technology," Schultz toldstore managers in Houston. Starbucks chose Square instead of about adozen other tech suitors because "Jack cracked the code on customerexperience," Schultz said.

For Starbucks, which already had asuccessful mobile-payments system, the partnership with Square expandsits formidable reach. Starbucks is the largest retailer acceptingmobile payments -- it handles more than 1 million mobile transactions aweek. The deal with Square lets credit card users who don't have aStarbucks card make mobile payments at the coffee chain. (Frequent-buyerrewards that come with Starbucks cards are not transferable to theSquare app.)

The Starbucks deal introduces Square to moreconsumers and helps the overall digital market, Denee Carrington, ananalyst at Forrester Research, said in a recent report.

WhileStarbucks has no immediate plans to displace cash registers with cardscanners, as Nordstrom and others do, its deal with Square does augur acontinued shift away from cash.

Payments on a 'massive scale'

Square'ssuccess has spawned competing services -- PayPal Here, NCR, Intuit andGroupon, to mention a few -- that have crowded the market, and givenconsumers one less reason to use cash.

Handicapping themobile-payments race, each major player has carved out a niche,according to analysts. Square is ideal for small merchants such ascoffee shops and food trucks. PayPal Here is positioned for businessesthat have an online and offline presence. Groupon's new service willappeal to businesses such as restaurants and spas with which it alreadyworks. Intuit's GoPayment is designed for small and midsize businesses.

Squareis generally in "good shape," Aite Group analyst Rick Oglesby says,because it has a head start on the competition -- and the Starbucks dealis "huge" by putting them in front of a mainstream audience.

"Noone else has really achieved that yet, so I'd say that Square isprobably off to the best start -- but it's going to be a very long andcompetitive race with more than one winner," Oglesby says.

Despitethe Starbucks deal, Square faces formidable competitors and majorhurdles to becoming a force with big retailers and corporations. "WhileSquare is new, it's just facilitating a 50-year-old payment mechanism -mag-stripe cards," says Nick Holland, an analyst at market researcherYankee Group.

Mobile-payment transactions will surpass $171.5billion, up 62% from $105.9 billion in 2011, says market researcherGartner. The ranks of mobile payment users worldwide, meanwhile, isexpected to vault 32%, to 212.2 million in 2012, from 160.5 million in2011.

Rocky Agrawal, an analyst at reDesign Mobile, offers acautionary note about the massive scale of payments, and how Squaresizes up. While Square claims to process $8 billion in transactionsannually, he says, American Express processed $822 billion.

Squaring up

Sinceits device and app launched in 2010 as a pioneer in mobilepoint-of-sale systems, Square has gained more than 2 million customers,who typically pick up the small, white plastic device for free throughthe company's website, or with a rebate from retail stores such asApple, Best Buy and Walmart.

Smaller businesses, such as coffeeshops and food trucks, use Square's device, which plugs into theheadphone jacks of mobile phones and tablets to perform transactions andkeep customer records.

The 400-person private company has grownquickly by raising capital from the likes of Visa and venture-capitalfirms Kleiner Perkins Caufield & Byers and Sequoia Capital. FormerU.S. Treasury secretary Lawrence Summers and Schultz are among its boardmembers.

Last month, Square said it raised $200 million in itslatest round of funding from investors that include Starbucks, CitiVentures and Rizvi Traverse Management. That now values Square at $3.3billion.

Square's device plugs into Apple and Android mobiledevices to enable smaller merchants who previously were only able totake payments made by cash or check, to accept credit cards by swipingthem through the dongle.

Square has widened its ambitions. Itoffers a merchant-finder for people to identify which businesses takeSquare payments; merchants can use it as a way to manage inventory; andthere are now options to pay with Square that do not involve youactually pulling out your card.

The Starbucks deal not onlybroadens Square's audience and visibility, but it "validates" thecompany's mission, Dorsey said in the interview. As a testament toStarbucks' influence among retailers and as an early technology adopter,Square has heard from several major retailers that now want to workwith Square. He hinted that more deals may be announced but gave nospecifics.

The pitched battle for mobile payments intensified inAugust, when Square announced a new pricing model that gives merchantsthe option to pay a monthly fee of $275 instead of the current 2.75% feeon every transaction.

Merchants who make more than $10,000 permonth in business would pay less under the new pricing plan. It's allpart of a move to make it easier for consumers and merchants to eschewcash, Dorsey says.