VeriFone Systems Inc is set to pull back from the hot business of signing up small merchants to accept credit cards payments, reducing competition for start-up Square Inc and other companies that jumped into the space recently, according to two people familiar with the situation.

VeriFone, a leading provider of card readers and payment processing services, unveiled SAIL in May, a service that lets small and individual merchants accept card payments through devices that plug into smart phones and other mobile devices.

The move was a response to the success of Square, a start-up led by Jack Dorsey, which has a card reader that has been a hit with small merchants such as cab drivers.

However, it is hard to make a profit from such services because the provider is at least partly responsible for any problems, such as fraud. That's one of the reasons VeriFone has decided to pull back from the business, the people said. They spoke on condition of anonymity because the decision is not public yet.

A VeriFone spokesman declined to comment.

In addition to VeriFone, EBay Inc's PayPal division, Intuit Inc and Groupon Inc have gotten into the small merchant payments business in the past year, making it one of the hottest parts of the massive payments industry. However, VeriFone's move may be an early sign of a shakeout in the sector.

Square is already branching out into other services and is focusing on much larger merchants. The company signed a major payments deal with Starbucks Corp , the world's largest coffee chain, earlier this year.

Groupon's payments business is designed to encourage more merchants to run its daily deals, rather than generate big profits for the company.

(Reporting by Alistair Barr; Editing by Peter Lauria, Phil Berlowitz and Nick Zieminski)