With ample fueling from mobile transactions, the potential for converting point of sale data into CRM and marketing data is massive. But as full of potential as this merger is across all retail purchases, it's particularly strong down market—and the smaller the business, the better.

Square's executives understand this. The mobile point of sale provider recently started pushing marketing functionality for its payments customers, even though it's initial offering is a pretty minimalistic feature set. There are a few reasons why small retailers—ideally one- or two-store merchants—have so much to gain.

First, these merchants have very few marketing capabilities and no IT staff. Therefore, even Square's initial barebones functionality is a generation or two more advanced than what most currently have. When upgrading from a bicycle, even a low-end Nissan feels luxurious. No need to start off with a high-end Mercedes.

Secondly, these small shops, such as dry cleaners, coffee shops, auto mechanics and independent pharmacies, have traditionally had very little technology. It's working with—or ripping out—the existing legacy technology that makes enterprise IT changes so expensive, painful and complicated. The Square product's absence of a lot of coding also means a rapid and painless upgrade path. This is why so much payments technology, such as PayPal's early efforts, are minimal for the large chains and cutting-edge for the smallest of retailers. In turn, this is why so much of the most advanced payments experiments are happening at coffee shops.

Square so wonderfully captures both the potential and the risk of such a strategy. Square is allowing its merchants (the vast majority of which are micromerchants) to use POS data to send out marketing emails. Insofar as it goes, that's great. The options offered, though, are very few. Among the most glaring omissions: No ability to send to the largest (or, for that matter, smallest) customers by revenue; and no ability to send messages to specific subsets. For example, mechanics can't send different messages to owners of new cars versus old cars, and coffee shops are unable to send different promotions to cappuccino fans versus drip coffee aficionados.

The biggest and most risky potential for this integration, though, is to build a single-view-of-the-customer, otherwise known as multi-merchant view. This is where the payment players can offer marketing opportunities for their customers, based on their shoppers' activities outside of their stores. This is an approach that no vendors have thus far endorsed, but it's hard to envision a path for profitability that doesn't include it. 

Many of Square's customers use its app at a wide range of local merchants, meaning that Square knows much more about those customers than their activity in any one store. Consider: What if merchants could be flagged when groups of their customers are sharply increasing their spending at other merchants—but not their stores? Wouldn't the ability to quickly send tailored emails to those customers be of huge value? Even better, what if a dry cleaner could be flagged that a group of its customers are now spending a lot of money at a new dry cleaner that opened two months ago?

Cory Capoccia, the president of small business marketing firm Womply, said that cross-merchant marketing is "a sensitive area," but added "I do believe that we will get there. Data has been underutilized, especially with SMBs." But why hasn't anyone gone there yet? The fear is that no one wants to be among the first couple of vendors to make the move publicly.

"As a group, consumers are the target for lots of different advertising from lots of different channels," Capoccia said. "And there are many different regulatory bodies that are looking out for them. The reason why most players are shy at getting down to that individual view of the consumer is that they don't want to draw the attention of those regulatory agencies."

There are ways of minimizing the risks, but they tend to rely on retailers exercising discipline, sophistication and subtlety with their marketing—which is a big gamble when dealing with small companies that have very little experience with marketing.

How could such a company avoid a problem? If the consumer recipients of these messages don't have their faces rubbed in the fact that this is the result of multi-merchant data access, it could work. Never say "Noticed that you visited that new coffee shop three times last week. How about a 50% off coupon to come back?" when it would be just as effective to say "We miss you. How about a 50% off coupon?"

The problem is that payments merchants would need to rely on the discipline of their retail customers. One or two over-reaches and a massive backlash could happen. The payment player may not have engaged in that over-reach, but they enabled it.

There is also another downside to Square's minimalistic approach. There are a huge number of hungry startups out there, looking for a way to differentiate. By not offering obvious marketing capabilities, Square is pointing them to the path to make a difference. Payments vendors are supposed to create barriers to entry, not unlock the front door.

Evan Schuman is a reporter for PaymentsSource.