Your business's point-of-sale system, also referred to as a POS system, is more than just a tool for accepting payments – it is an important part of offering an excellent customer retail experience. As a result, the POS industry is booming: in 2020, POS software constituted a US$9.3 billion market, and it's projected to hit US$18.1 billion by 2027.

A simple checkout experience builds loyalty and enthusiasm in customers. If your POS system works quickly, intuitively and without error or disruption, your customer will enjoy a smooth checkout process. A bad checkout experience might include waiting a long time for the card reader to accept payment or having to restart the payment process while your customer waits.

A reliable POS system that caters to for your needs and which you and your employees know how to operate is important for your business. We'll cover everything you need to know about POS systems including how they work and the role they perform for small businesses.

What's in this article?

• What is a point of sale?
  
• What is a POS system?
  
• What are the different kinds of POS hardware?
  
• How do POS systems work?
  
• What does POS software and hardware cost?
  
• What else do I need to use a POS system?
  

What is a point of sale?

The terms "point of sale" or "POS" usually refer to the POS systems that power in-person customer payments to businesses. More generally, the point of sale also refers to the time when a customer makes a purchase and where that transaction takes place. It could be the checkout counter at a brick-and-mortar shop, a folding table at a pop-up booth, a makeshift counter at a food van or an in-home massage therapist taking payment from a client on their mobile device.

What is a POS system?

A POS system includes the hardware and software that enable businesses to accept payments from customers at the point of sale, and so much more. Some additional functions that modern POS systems routinely perform for businesses are:

• Update inventory
  
• Track sales
  
• Manage cash register
  
• Print receipts
  
• Scan barcodes and QR codes
  
• Clock employees in and out
  
• Run reports on sales and other analytics
  
• Manage customer accounts and rewards
  

What are the different kinds of POS hardware?

There are different types of POS hardware:

• Card reader
  
• Connected device
  
• Cash register
  
• Barcode scanner
  
• Receipt printer
  

Modern POS systems help small businesses accept a range of payment methods from customers quickly, easily and securely.

How do POS systems work?

POS systems give businesses the ability to accept payment from customers, process transactions and communicate with their payment-processing provider. Some can also automatically update the inventory and collect sales data for easier bookkeeping.

To accept payments, POS systems must communicate with three parties:

The customer's payment method

Customer payment information such as a credit card number is transmitted to the POS system when the customer swipes the magnetic strip on a card, inserts an EMF chip or taps for NFC-enabled contactless payment.

The customer's bank (or other financial institution)

The POS system is either hardwired to the internet or connected to Wi-Fi and electronically communicates with the customer's financial institution to verify that funds are available for the transaction amount.

The business's payment processing provider

The POS will also communicate electronically with the business's payments processor. This is often the same company that issued the POS hardware and software, as is the case with Stripe.

Broadly speaking, POS setups fall into one of two categories:

On-site or on-premises

On-site POS systems are hosted locally on the business's computer, typically don't require an internet connection and are likely require the business to pay a licensing fee for the software. Businesses will need to update the software and complete other tasks manually, but some prefer to have their sales data stored locally.

Cloud-based

The majority of businesses use cloud-based POS systems, which store and access data on the internet. Software as a service (SaaS) companies typically provide these cloud-based POS solutions and charge on a subscription basis. Businesses can remotely access cloud-based POS systems, allowing flexible access to their sales data and enabling them to connect multiple devices to a central POS system.

How POS systems work depends on the components, and these components vary according to business needs, but the steps involved in using a POS system are generally the same:

Input the items for purchase

The business "rings up" the customer by communicating to the POS system what is being purchased and how much it costs.

What this looks like depends on what the customer is buying. If they're purchasing physical goods in a shop, the business might use a barcode scanner to pull up the items on whatever connected device they use with their POS system, such as an iPad. If the customer is paying for a service, such as a therapy session or gardening work, the business might select the service from a menu on the POS software on their smartphone or manually input the price and notes about the services rendered.

Calculate the subtotal

The POS system calculates the subtotal, which is the total cost of everything being purchased before additional charges like tax are added.

Determine tax, shipping and total cost

Next, the POS system calculates the total cost, including price, tax and shipping.

Prompt the customer to add a tip (if applicable)

Tipping isn't relevant for all transactions, but most POS checkout flows include an option to prompt customers to leave a tip, either by selecting from a range of standard options (usually 10%–25%) or by adding a customised amount.

Accept payment

After the POS calculates the total cost of the transaction, the customer submits the payment. Most POS systems accept a wide variety of payment methods, including credit and debit cards, cards and digital wallets that use NFC-powered contactless payments, gift cards, rewards points and cash.

Communicate with acquiring and issuing banks

If a customer uses a payment method that draws on an outside account, such as a credit card, debit card or digital wallet, the POS system will transmit the transaction details to the business's bank (called the "acquiring bank" or "acquirer") so that it can communicate with the customer's bank (called the "issuing bank" or "issuer") to obtain approval for the transaction. This usually takes a couple of seconds.

Complete transaction

Once the transaction is approved and payment is accepted, customers can typically opt to receive a printed receipt, an emailed receipt or no receipt at all.

Update inventory

Some POS systems also update the inventory based on what has been sold for a real-time view of goods: important for ordering new stock and preventing chargebacks.

What does POS software and hardware cost?

On average, cloud POS systems cost around $1,300 for the hardware and $69/month for the software. POS hardware ranges from $0 to $1,700, and POS software costs most businesses between $0 and $300 per month, per terminal. Be wary of free POS hardware and software: they typically have functional limitations, patchy support and come with conditions or restrictions.

You can find Stripe's pricing here.

Total costs for setting up and maintaining a POS system will depend on a few factors, including:

• Number of terminals
  
• Number of employees
  
• Number of transactions
  
• Size of inventory
  
• Type of business or industry
  
• Additional features or payment-processing support
  

What else do I need to use a POS system?

There has been a proliferation of tech-enabled devices that can run POS software, and businesses have more choices than ever in ways of setting up POS payments. What each business needs to set up and operate their POS system depends on whether they have a ready-to-use POS solution or are building something custom-made. Stripe's approach to point of sale technology is to make the process effortless and provide comprehensive support, while also allowing businesses to customise their setup.

Stripe Terminal gives businesses the power to tailor their point of sale and own their checkout experience with features such as customised email receipts and reader splash screens. Stripe Terminal is not a ready-to-use POS solution: it requires programming experience with JavaScript, iOS, Android or server-driven UI, depending on the integration mode the business chooses. Terminal enables businesses to integrate Stripe payments into their existing in-person checkout flows or build in-person payments into their native mobile or web-based point of sale application. For businesses that would rather integrate a third-party point of sale, here's a list of platforms that work with Stripe.