By designing their reader the way Square has, it drastically minimizes cost and opens the design so it works with most smartphones and even many laptops.
I hope that screenshot isn't representative of their software, either... it looks horrendous.
I leave my iPhone in my pocket with a headphone jack for hours at a time while walking/running/etc., and am ridiculously clumsy - I get the cable caught on doorknobs, go to sleep with earbuds on and have the headphone cable tugged out at odd angles, etc, without any apparent damage to the headphones or the iPhone. I've done this with every iPhone I've had since the first one, also, and the worst that's happened is an Apple Store Genius had to pull a bit of fuzz out of the bottom.
I admit this is purely anecdotal evidence, but as long as the reader itself is built well I see no reason why Square's reader wouldn't hold up in a retail environment.
If it really becomes a problem, there's no reason Square couldn't provide a reader similar to Verifone's. But with Square's method they get a ridiculously fast time to market across a wide variety of devices with far easier to manufacture devices and no lengthy Made for iPod approval times or worrying about supplies of iPod authentication chips from Apple.
By designing their reader the way Square has, it drastically minimizes cost and opens the design so it works with most smartphones and even many laptops.
I hope that screenshot isn't representative of their software, either... it looks horrendous.