Apple may have its own in-store, handheld “cash” registers using modified iPod Touches, but what if you, too, want a slick and small credit-card payment system? Sure, you could get one of those chunky, cellular card-readers on loan from the credit card company. Or you could get a dongle for your iPhone. We all know that the iPhone can do many things — and processing credit card transactions is already one of them, thanks to a veritable host of Apple Store apps for just that purpose. But have you ever seen a credit card actually swiped into the device?

Here’s the crazy-cool innovation of the day. Jack Dorsey, the creator of Twitter, has invented a new device to turn iPhones into a credit card payment system. And this isn’t merely an application that lets you type in a credit card number: this consists of an attachment that allows you to actually swipe credit cards to obtain payment. There’s some impressive creativity at work here. Twitter co-founder Jack Dorsey is the man behind the service (and KevinRose himself is an investor), which plans to roll out officially sometime this year.

In addition to making it easier for small business to accept credit cards from virtually anywhere thanks to the hardware dongle, the Square software appears to be a lot more streamlined than the other current offerings as well. And anyone can use Square, from boutiques to street vendors. The device attachment itself can fit on your keychain. You just need an iPhone, but the company is planning on expanding the device and software to work on other smartphones as well. Cardholders can sign using the iPhone’s multitouch screen and even receive a receipt via e-mail or the web, complete with a small Google Map indicating where the purchase was made.

Judging from the video, the process is pretty streamlined, with the possible exception of the hardware dongle itself — for some inexplicable reason, it uses the audio jack instead of the dock connector. Our guess is that this is designed to circumvent the hefty fees that Apple charges developers who want access to the dock connector, but given the fragile nature of the 1/8-inch plug, we think it won’t be long before somebody snaps the Square dongle off inside the jack. (iPhone case designer Mophie has also announced a credit card reader which they showed off at CES this month, which solves the Square dongle problem by building the reader into the case itself.)

So how do you get this device for your own home/store/restaurant/magic wand shop? You need to sign up for a two-year contract with Payware, whereupon the card reader will be tossed in for free. It’s only available for pre-order right now, but we fully expect to see similar solutions from other vendors.

I just love technological innovation like this. With each incredible new mobile device application, it seems like the world is getting closer and closer to attaining the kind of gadgets we read about in science fiction. Now about those flying cars.?