Merchant POS systems explained: How they work and how to choose the right one

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  1. Introduction
  2. Merchant POS system trends
  3. Merchant POS system components
    1. Hardware components
    2. Software components
  4. How to choose the right merchant POS system
  5. How Stripe Terminal works for businesses
    1. Hardware
    2. Software
    3. How it works as a POS

A merchant point-of-sale (POS) system is a combination of hardware and software that allows businesses to complete transactions and manage their financial operations. Typically, a POS system's hardware includes a till, receipt printer, barcode scanner and payment terminal for processing credit and debit cards. A POS system's software can track sales, manage inventory and generate reports, among other functions. Demand for POS systems with mobile capability is increasing, with the mobile POS market worth US$36 billion in 2022, according to Grand View Research.

Below, we'll have a closer look at what businesses need to know about POS systems, including their hardware and software components, how modern POS systems work to elevate the customer experience and streamline business operations, and how Stripe Terminal responds to the most pressing needs of businesses to offer an agile, powerful POS system. Here's what you need to know.

What's in this article?

  • Merchant POS system trends
  • Merchant POS system components
  • How to choose the right merchant POS system
  • How Stripe Terminal works for businesses

Merchant POS systems have evolved over the years to include various features, such as customer relationship management (CRM), employee tracking and even e-commerce integration. Different types of businesses – from retail businesses and restaurants to salons and gyms – can customise merchant POS systems to suit their specific needs.

Some POS systems are cloud-based, with advancements in cloud computing expanding their capabilities. These systems offer the benefit of real-time access to data from anywhere, which is particularly useful for businesses with multiple locations or for managers who oversee operations remotely. Compared with non-cloud-based POS systems, cloud-based alternatives can improve data security and backup, as information is stored in secure data centres complete with redundancy measures.

Another trend in POS systems is an increased focus on the customer experience. Modern systems often include CRM features, loyalty programmes and targeted marketing features, allowing businesses to offer a more personalised shopping experience. Mobile POS systems – which enable businesses to process transactions anywhere within a shop by using a tablet or smartphone – are also gaining traction, as they facilitate better customer interactions.

Merchant POS system components

POS hardware and software serve distinct, yet interrelated, functions. Hardware components, such as card readers, barcode scanners and cash drawers, facilitate the physical aspects of transactions. Software elements manage the data, communicate with payment gateways for authorisation, and often include features for inventory management and customer relations.

Here's a breakdown of the different components.

Hardware components

  • Cash register or cash drawer: stores cash, coins and other valuables. Usually, they are connected to the POS system and open automatically to complete a cash transaction.

  • Receipt printer: prints out paper receipts for customers. Some modern systems allow businesses to send digital receipts via email or short message service (SMS).

  • Barcode scanner: scans the barcode on items to quickly add them to the transaction. This automates the inventory tracking process and helps to keep checkout totals accurate.

  • Payment terminal: this device processes credit and debit card payments. Some terminals can also process contactless payments, such as Apple Pay or Google Wallet.

  • Customer display screen: a screen facing the customer that shows the items as they are rung up, including their prices and the total cost.

  • Touch-screen monitor: acts as the interface for the POS software. Employees can input items manually, apply discounts and perform other necessary tasks.

  • Scales: used in businesses that sell items by weight, such as food shops and delis.

  • Mobile POS devices: these are tablets or smartphones that contain POS software and offer increased flexibility in handling transactions. Often, they are used in restaurants for table-side payment or in retail for line busting, easing waiting times and reducing long queues for checkout.

Software components

  • Sales tracking: records each sale, making it easy for businesses to reconcile accounts and understand how well the business is performing.

  • Inventory management: keeps track of stock levels and allows businesses to automate re-ordering processes if inventory falls below a certain level.

  • Customer relationship management (CRM): stores customer data and purchase histories, which can inform marketing efforts such as loyalty programmes or targeted promotions.

  • Employee management: allows businesses to track employee hours, sales performance and task assignment.

  • Reporting: generates reports on sales, revenue, inventory and other key performance indicators (KPIs).

  • Tax configuration: calculates tax based on regional laws automatically, simplifying the end-of-day accounting.

  • Multi-channel integration: if the business operates an online shop and a physical location, some POS systems can integrate the two for more coordinated stock management.

  • Payment processing: handles payment transactions securely, ensuring that all sensitive data is encrypted and complies with industry standards.

For businesses that accept payments online and in person, an integrated solution – such as the one offered by Stripe – can offer important benefits. Stripe Terminal works with Stripe's online payment platform to enable a unified commerce experience. Businesses can monitor all transaction data from a single dashboard, whether the transaction originates in a physical shop or an online basket. The benefit here is twofold – it offers streamlined operations for the business and a consistent, smooth experience for the customer across multiple channels. This comprehensive view allows businesses to make more informed decisions, while also simplifying the customer's interaction with the brand.

How to choose the right merchant POS system

Selecting the right POS system for your business is a multi-faceted process. Below are some considerations to bear in mind:

  • Specific business needs
    Take stock of what your business requires. This could range from basic sales transaction processing to more complex inventory management, employee tracking and customer relationship management. Your priorities should guide your choice. For example, a cafe might prioritise speed and ease of use, while a clothing boutique may put a greater focus on inventory management and customer data collection.

  • Scalability
    Choose a POS system that can grow with your business. This means looking for systems that allow you to add more terminals or integrate new features easily. Often, a cloud-based solution can grant you the flexibility to add or remove features as you scale your operations.

  • Budget considerations
    Compare both the up-front and long-term costs of different POS systems. Some systems come with monthly fees, while others have one-off licencing costs. Factor in the costs of any related hardware or software, plus the cost of updates further down the line.

  • Payment processing
    Different POS systems accept different forms of payment, including credit cards, mobile payments and even cryptocurrencies. Choose a system that accommodates multiple payment methods, as this increases the likelihood that a customer will complete a sale.

  • Usability
    A POS system should be user-friendly for employees and customers. Staff should be able to operate the system with minimal training and customers should find it easy to use any customer-facing components, such as kiosks or digital checkout platforms.

  • Data reporting and analytics
    Advanced POS systems offer data analysis capabilities, allowing businesses to track sales, customer behaviour and inventory. This data can be an invaluable tool for making informed business decisions.

  • Hardware compatibility
    If you already own hardware, such as cash drawers or barcode scanners, you can cut down on additional expenses. However, you'll want to make sure that your POS system is compatible with your hardware.

  • Security
    To protect against data breaches and fraud, prioritise POS systems with strong security measures, such as encryption and two-factor authentication.

  • Regulatory compliance
    Ensure that the system you select complies with all relevant laws and regulations. This includes tax calculation and any industry-specific requirements, such as age verification in shops that sell alcohol.

  • Reviews and recommendations
    Take advantage of word-of-mouth and online reviews. Consult other businesses that have used the POS systems you're considering so that you can learn from their experiences.

Bear these factors in mind to help you make an informed decision that meets your operational requirements.

How Stripe Terminal works for businesses

Stripe Terminal is a payment solution for in-person transactions that works seamlessly with Stripe's online payment platform. It provides businesses with the necessary hardware and software to accept payments in a physical location while integrating with their existing Stripe setup. Here's how it works:

Hardware

Stripe Terminal offers a variety of card readers that are capable of accepting chip cards, contactless payments – such as Apple Pay – and traditional magnetic stripe cards. These readers connect to your point-of-sale system via Bluetooth, USB or through the internet.

Software

The software component is a software development kit (SDK) that can be integrated with your existing POS system to create a consistent experience across your online and in-person presence. If you already use Stripe for online payments, the Terminal can be a straightforward extension that lets you handle in-person payments.

How it works as a POS

  • Customer checkout: when a customer is ready to make a purchase, your POS system sends a request to the Terminal SDK to initiate payment.

  • Card reading: the customer taps, inserts or swipes their card on the Stripe card reader.

  • Payment processing: the Terminal SDK communicates securely with Stripe's servers to process the payment. All card data is encrypted.

  • Transaction completion: once the payment has been approved, the Terminal SDK notifies your POS system, which prints a receipt or sends the customer a digital receipt.

  • Data sync: as Terminal is part of Stripe's broader payment environment, all transaction data is available in your Stripe Dashboard, making it easy to keep track of both online and in-person sales, perform analytics, and handle refunds and customer disputes.

  • Inventory and reporting: if your Stripe setup already includes integrated inventory management, the Terminal will update inventory counts in real time as transactions are completed.

Stripe Terminal makes it easier for businesses to offer their customers multiple payment options while simplifying back-end transaction operations. This integrated experience allows businesses to manage all payments in a cohesive way, whether those payments are made online or in person.

Learn more about Stripe's POS solutions for businesses.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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