They say we’ll never have to swipe our credit card again. Instead, smartphones will take care of our sins virtually, one tall latte and coffee cake breakfast at a time.

The app is called Pay with Square and it’s available right now for Android (2.2 and up) and iOS (4.1 and up). Square first stormed the market with apps for processing credit card transactions (Square Card Reader, Square Register). Now they’re expanding — smartly so — and tackling  the enormous opportunity that is mobile payments (aka Mobile as PoS). According to IE Market Research, the global volume of mobile transactions will reach $298 billion this year and $1,130 billion by 2014. Annual growth is expected to be approximately 95% (CAGR). Yes, this is a highly desirable space.

Watch out Foursquare, and Yelp.

A handful of merchants across the San Francisco Bay Area are now accepting Pay with Square. Some in San Jose that I’m aware of include Charlie’s Cheesecake Works (1179 Redmond Avenue), Smoking Pig BBQ (Smoking Pig BBQ), and Aroma Coffee and Snacks (Aroma Coffee and Snacks). Sorry, but as far as I know, the epic Falafel Drive In on Stevens Creek is not yet on board.

How does Pay with Square work?

First, you’ll link a credit card.

American Express, Visa, Mastercard are supported. Once you’ve entered the information on two simple screens on your iPhone or Android, you’re immediately presented with a list of nearby places that accept the virtual payments. Foursquare?! Yelp?! This could get interesting. Click on a business and you get a very Foursquare-like profile, including a Google Maps pin and a history of your visits.

Now here’s the magic.

When you want to make a payment, say for that pastrami double-double and side of pork rinds, you do… nothing. Well, you verbally confirm the transaction, but other than that your done; the cash register has already grabbed information from your smartphone – notably your photo and payment information. Yes, privacy watchdogs, let’s get this thing started. For me, though, it’s amazingly convenient.

Link your credit card to the app and you’re ready to leave home without your wallet.

Especially neat are the menus, that are updated in real-time in the app. Peggy Sue swinging by with two laminated menus and some Joe could very well be a thing of the past — uh…  wait,  maybe it already is.

There are a few downsides.

Merchant selection is limited at this point. Chances are the places you really do want to eat at are not yet here and that includes places like Starbucks (Anywhere), Slanted Door (San Francisco), and University Coffee (Palo Alto). I’ll take a quick guess and wager that French Laundry is not yet with the virtual program yet either. There’s a cost related to infrastructure, payment systems required to make it work. But that’s not the real hurdle. The biggest issue of course is money. There is a battle royale for your virtual dollar. Heavyweight participants include Google, Visa, American Express, eBay/PayPal among others including Square. If NFC gains momentum (as we’ve been hearing it will for so long it seems) it could pose a serious threat to Square.

Are virtual payments the future?

Yes. Absolutely.

I don’t think I’m exactly sticking my neck on the line in stating that.

One downside: Businesses accepting Pay with Square are limited in numbers.

It’s taking longer to roll out then I’d expected. But since smartphones are so integral to our lives already, it makes perfect sense that they extend things we already do with them — coupons, maps, social networking, identity, location discovery, etc.

To make payment, you verbally confirm the transaction.

Here’s a marketing video by Square — featuring polite music, a dog, an interracial couple and ice cream — on how it works:

Download: Pay with Square:  Android on Google Play, iOS on Apple iTunes.