Many companies, including Google and PayPal, are racing to become the go-to option for customers who want to pay with their smartphones. Still, mobile payments haven’t caught on yet in the mainstream, with one exception: Starbucks, which has built the largest mobile payments network in the country through its official Starbucks app.

The experience wasn’t as convenient as it could be, though: first, customers had to first fill up their Starbucks loyalty cards before they could use the app to pay. Still, Starbucks processed 26 million transactions in 2011. As of today, the company has processed over 60 million mobile transactions, with well over one million mobile payments now being conducted every week.

So it was interesting, but not totally surprising, when Starbucks announced a huge partnership and $25 million investment in a promising young mobile payments startup. Square, the three-year-old payments startup from Twitter cofounder Jack Dorsey, has previously focused on serving small businesses. By hooking up with Starbucks, Square will have instant access to a network of 7,000 participating stores and a broad new base of customers.

"Over the past six months or so we've literally been contacted by most of the high-profile tech companies who have been chasing ways in which to monetize mobile payments," Starbucks CEO Howard Schultz said in a small press briefing this morning at New York City's incredibly posh Crosby Street Hotel. "After meeting with them...I contacted Jack to understand what Square was doing, and I think once Jack and I sat down it was very obvious to me that the technology, innovation, and the lens through which they were looking...was a natural opportunity for us to create this partnership."

Even before partnering with Square, Starbucks had the largest mobile payments network in the country

Starbucks will add a "Pay with Square" feature to its popular mobile app, which already allows customers to make digital payments. The difference is that previously, customers had to load money onto their Starbucks cards and then use their phones to pay. Thanks to Square, customers can make debit and credit card payments using the Starbucks or Square app without a Starbucks card. While there are no concrete dates for when Starbucks will begin accepting Square payments, Schultz said the option will be available in "all of our US stores before the holiday season."

The partnership means mainstream exposure for Square, a Silicon Valley darling that currently boasts two million users and previously focused on small, independent merchants. It also puts Starbucks at the forefront of the mobile payment revolution; besides being able to offer its customers a hip new way to pay, Starbucks now has a large stake in a fast-growing company valued at $3.25 billion.

When Square started, it was just an eponymous white credit card reader that plugged into the iPhone and made it possible for anyone from flea market vendors to political campaigns to take card payments. Gradually, Square started offering more products, including a way to pay with just your name and a digital loyalty card. Square says it is now processing $5 billion in transactions a year.

Square has also developed the Square Directory, which points consumers to the 75,000 business that accept Square payments. As part of the new deal with Starbucks, the Square Directory will be included in the Starbucks mobile app, a strategic move that both companies say will help drive adoption of the payment service. Given that establishing a network has been one of the biggest challenges facing the various mobile payment systems, Starbucks' massive reach essentially put Square's network on steroids.

Partnering with Starbucks essentially put Square's network on steroids

Square has raised $166 million from investors and is expected to announce more, as Starbucks was just one of the investors in this round of financing. Previous investors include vaunted Silicon Valley firm Sequoia Capital as well as Virgin founder Richard Branson and ex-Googler-now-Yahoo-CEO Marissa Mayer. Square also got an investment from Visa, a "strategic" move that bolstered Square's credibility on security and Visa's credibility on innovation.

At today's event, Dorsey noted that "we believe a lot of our recent funding will go towards our international efforts." As for when the Square / Starbucks partnership might make its way into other countries, Schultz said that "it'll be up to Square and Jack when or if we want to sequence other international markets." Dorsey then replied, "we're pushing very, very hard to bring Square outside of the United States, and we'll definitely have some announcements soon about where those markets are." So while there was no timeline given, it sounds like we'll learn more about Square's plans beyond the US soon.

Nathan Ingraham contributed to this report.