Starbucks recently made headlines when it announced that it was teaming up with Square to improve its overall customer experience.

The coffee giant, already familiar with mobile payments, not only invested in, but agreed to integrate Square’s payment solution into thousands of its retail stores across the U.S.

This partnership is significant for both companies, as well as the payments industry as a whole. Let’s take a look at what this deal means for the future of mobile payments.

The State of Mobile Payments

Currently, the mobile payments industry is a hotbed of activity. There are several startups and established companies battling it out to be the easiest and fastest solution. Although many contenders are hosting localized trials among merchants and consumers, they’re still finding that acceptance of mobile payments isn’t where they had hoped.

Despite being regarded as one of the countries most prepared for mobile payments, adoption rates in the U.S. also pale in comparison to those in other countries. The opportunity in this space is huge, but with so many players focusing on domination instead of collaboration, there hasn’t been a clear leader — until now.

Square in the Spotlight

Square, which initially made its debut with smaller brick and mortar businesses, has now become a leader in the mobile payments race — something that giants like Google have been unable to claim. Square has already struck deals with Walgreens, Staples, and FedEx, and will soon be used in 7,000 Starbucks locations throughout the U.S.

Beginning this fall, Starbucks customers will be able to make purchases using Square’s application, “Pay with Square.” However, Starbucks will not have a Square Card Reader or Square Register at this time. Instead, Square will integrate with Starbucks’ point-of-sale systems.

Additionally, Starbucks said that its existing mobile app — which processed more than 26 million mobile payments in 2011 — will remain a separate payment option from Pay with Square. A spokesperson for Starbucks said the company’s goal is to eventually integrate “My Starbucks Rewards” (which is currently tied into Starbucks’ mobile app) into the Pay with Square payment option.

What Lies Ahead

It’s true that Square doesn’t do much to change the check-out experience overall; people still have to wait in line. But while it might not revolutionize the way people pay, the Square/Starbucks partnership could help to revive interest in mobile payments among consumers. One of the biggest challenges most mobile payment companies are facing right now is adoption. With a Starbucks on almost every corner, mobile payments will be introduced, and in some cases re-introduced, to hundreds of thousands of U.S. consumers.

But while this could sway shoppers, retailers — especially competitors — might be reluctant to adopt Square into their current systems. Seth Priebatsch, chief executive of Scvngr warned that taking an investment from Starbucks could be a dangerous strategic move for Square.

“By inviting Schultz onto the board, I think they’ve potentially alienated a large portion of Starbuck’s competitors. If I was Dunkin’ Donuts or 7-Eleven or Peet’s Coffee, I wouldn’t touch Square with a 10-foot pole. Giving one retail partner undue influence over a whole payment ecosystem is a dangerous precedent to set,” says Mr. Priebatsch.

Future success depends a lot on which companies Square integrates with next. Should other retailers be turned off by the investment, Square isn’t the only option. PayPal recently launched its own mobile payment solution called “PayPal Here.” It features a small, triangular dongle that plugs into the audio jack of your mobile device.

But before small businesses race to install Square, PayPal Here, or any other mobile payment solution, it’s important to weigh the convenience against the cost. Mobile payments still have a long way to go before people can ditch their wallets. It’ll be an interesting journey, and one in which Square is positioned to come out of strongly.

[Image credits: Justus Blümer, tableatny, Chris Harrison, josef.stuefer]