Key takeaways:
- A POS system streamlines the transaction process and provides accurate, real-time data to improve business operations.
- The features of a modern POS system allow businesses to provide faster checkout and a variety of payment options for customers.
- The right POS system depends on the POS hardware, software, and payment processing tools that match your business requirements.
- The initial cost of POS systems can range from free to up to $2,000, depending on your chosen hardware setup, POS software features, and payment processing needs.
What is a POS system?
A point-of-sale (POS) system is a set of tools that allow businesses to process and complete transactions. It is a combination of hardware and software that captures and maintains updated records of all products (or services) and payment exchange at “the point of sale.”
In the early days, businesses processed transactions using cash registers. Modern POS systems include business tools for reporting, inventory, and customer relationship management. They are also built to seamlessly integrate with additional features, such as staff and payroll management, loyalty and marketing, order fulfillment, and accounting.
Types of POS systems
POS systems can be categorized into:
- Legacy POS systems replaced the traditional cash register. Nowadays, they are primarily used for open-source POS that businesses can customize. Data is stored on-site in physical servers.
- Modern POS systems, developed by third-party providers, use software with less bulky proprietary hardware and/or popular mobile devices. POS data is stored on cloud-based servers, making it more accessible.
For this guide, we focus on the four types of modern POS systems.
Desktop POS
Like its predecessors, the desktop or countertop POS setup consists of a cashier display, cash drawer, thermal printer, and payment terminal. It is set up at a fixed section of a brick-and-mortar store where customers line up to check out and pay for their purchases.
Mobile POS
A mobile POS system uses software that works on portable devices such as smartphones, tablets, and handheld POS terminals. An app-based POS can use either Android or iOS software. Of course, the iOS POS app works on iPhones and iPads, while the Android POS app can run on any Android tablet or smartphone.
Alternatively, other mobile POS software was developed exclusively for proprietary handheld POS terminals. These all-in-one devices are equipped with a built-in screen, keypad, card reader (magstripe and NFC), barcode reader, and thermal receipt printer.
Self-service kiosk
A self-service kiosk is an unmanned, fixed POS setup. Customers or sales staff can check out their purchases at the station. Self-service kiosks usually have a touch-screen display, payment terminal, and thermal receipt printer. There are optional barcode scanners and weighing scales, such as in supermarkets.
Multichannel POS
A multichannel POS system comes with one POS software that operates on some or all the abovementioned types. A significant addition is the ecommerce channel, where the same POS software and payment gateway are built into an online platform (online POS system).
Most multichannel POS also have omnichannel features that allow businesses to sync their POS data and access it from a single platform.
See: 6 Best Cloud-based POS Systems
Parts of a POS system
There are three major components of a POS system.
POS hardware
The POS hardware captures and displays POS data. It comprises different parts that, together, complete the transaction process.
- Register: The register consists of a display and keyboard (like a desktop computer). The display shows the current activity being processed in the POS system, while the keyboard allows users to input or edit displayed data.
- Barcode scanner: The barcode scanner is an input device that captures inventory barcode data on products, which is then displayed on the register.
- Payment terminal: The payment terminal (also known as a POS terminal) captures the customer’s payment information via card reader methods (magstripe, EMV chip reader, NFC scanner) and a keypad for entering price or PIN code.
- Receipt printer: The receipt printer generates transaction slips that cashiers can issue to customers. It displays the complete transaction record, including the customer’s payment method and merchant information.
- Cash drawer: The cash drawer is integrated into the POS software, allowing the system to monitor cash transactions. Copies of transaction receipts for card payments are also stored in the cash drawer.
- Customer display: An optional customer-facing display shows the price and outstanding amount as products are scanned. Advanced models come with a card reader and an interface where customers can affix their signature or even leave feedback.
POS software
The POS software is the program that allows users to organize POS data, process sales, and generate reports. Equally important is the software’s ability to integrate other programs, particularly the payment processing service, to complete a POS transaction. POS software can be simple or industry-specific.
The capabilities programmed into a POS software makes it possible to have different types of POS systems and platforms.
POS payment processor
The POS payment processor is an integral part of the POS system. Without this, it’s impossible to complete a customer’s transaction. The payment processing service is provided by a third party that can be integrated into POS software. Once connected, the payment software can receive transaction data and request payment from the customer’s source of funds (like a credit card).
How does a POS system work?
A POS system stores inventory data before any transactions with customers. Once this stage is complete, the systemise ready to process transactions. The diagram below shows how inventory and transaction data are processed in a POS system.
During a transaction, the POS system uses hardware to capture transaction data while the software processes the information to accept payments. The integrated payment processor sends the entire transaction data to the customer’s bank to approve the payment. Once done, the POS software updates inventory data and creates a sales record.
Features of a POS system
Each part of the POS system contributes to its overall features. While some providers offer more functionalities than others, some basic POS features are necessary for a business to operate.
Checkout (register)
The checkout register is not just a simple POS hardware. However, it may be recognizable as a digital version of the traditional cash register, where a computer keyboard or touch-screen interface replaces the programmable buttons. The POS software also displays the modern payment processing window.
See: POS Terminals Explained by Experts
Inventory management
Built-in inventory management feature sets POS systems apart from cash registers. It conducts real-time updates to inventory movement for every transaction, resulting in accurate inventory levels and reports less prone to human error. The inventory feature can generate barcodes that an integrated barcode scanner can read.
Payment processing
Though some providers still offer a non-integrated option, the modern POS system comes with a seamlessly connected payment processing feature. The payment processor provides the payment gateway that integrates with the POS checkout window, where you can find all the transaction data. The same payment processor is used for multichannel POS with mobile and e-commerce checkout.
See: 6 Best Payment Processing Companies
Customer relationship management (CRM)
POS software has a CRM feature that allows businesses to store customer profiles and track their purchase history and payment information. Businesses can use this data to nurture relationships with personalized loyalty programs and marketing campaigns.
Security
POS systems come with security features that protect them from unauthorized access, such as PIN for cash drawers and password for the POS dashboard. POS software also feature malware protection with regular automatic security updates. The payment processor’s gateway includes machine-learning fraud detection tools to prevent unauthorized transactions.
Reporting
Reporting is a crucial feature in a POS system. At the very least, businesses should be able to generate sales and inventory reports whenever necessary. While this was already possible with traditional cash registers, a POS system can generate accurate reports at any given time.
Additional POS features
The best POS service providers also come with one or all of the following additional integrated features:
- Marketing: Used in conjunction with CRM data to provide tools for creating email and SMS campaigns and other strategies to attract new and retain customers.
- Loyalty: Also linked to CRM data to create loyalty programs based on a customer’s purchase history.
- Omnichannel: Allows multichannel POS systems to have unified access to data regardless of where the sales occur.
- E-commerce: Some POS systems come with built-in website builders that allow seamless access to real-time inventory and sales data.
- Analytics: Advanced POS reporting capabilities include analytics, which allows businesses to develop sales trends.
- Staff management: Allows businesses to set different log-ins and access levels for their employees and even shift schedules, increasing the security of their POS system.
- Payroll management: Ideal if your POS system comes with a staff management feature, making payroll management faster and less prone to human error.
- Vendor management: Maintains vendor contact information and associated inventory; can automate reordering if linked to a set inventory reorder point.
- Accounting: Automates bookkeeping, tax reporting, invoicing, and other payment-related activities such as bills payments and payouts.
See: 7 Best POS Systems for Small Businesses
How much does a POS system cost?
A POS system used to be expensive to purchase and set up. Fortunately, affordable POS systems with software compatible with mobile devices are now available. Businesses can choose how much they want to spend depending on the POS features and equipment they require. Some of the best POS systems even offer a free all-in-one solution.
POS hardware cost
$0-$2,000
- Basic setup: Mobile POS app with manual payment entry feature. Cost: $0
- Basic setup: Mobile POS app connected to a mobile credit card reader for swipe, chip, and NFC payments. Cost: $0-$100
- Intermediate setup: Mobile POS app in a countertop set up (barcode scanner, card reader, thermal printer) $150-$500
- Intermediate setup: Handheld POS device with barcode scanner, card reader, and thermal printer) Cost: $175-$300
- Advanced setup: Complete hardware kit for retailers. Cost: $650-$1,500
- Advanced setup : Complete hardware kit for restaurants, including kitchen display. Cost: $650-$2,000
POS system software cost
$0-$200
- Basic: Basic capabilities in key features, gated functions for higher plan or paid integrations. Cost: $0-$130
- Intermediate: Full access to key POS features, but will require upgrade to paid plan for more advanced tools. Cost: $40-$150
- Advanced: Full access to POS software features, but will still require payment if adding integrations. Cost: $80-$250
POS payment processing cost
$0-$200 monthly fee + transaction rates
- Basic: Basic credit card processing and invoicing tools. Cost: $0-$20
- Intermediate: Additional payment features, such as online payment gateways and advanced invoicing features. Cost: $21-$100
- Advanced: More advanced tools, such as customized checkouts and subscription management tools.
Payment processing can also be dictated by pricing models, which usually depend on sales volume.
- Flat-rate pricing: A combination of the card network’s interchange rate and the payment processor markup plus a monthly fee that starts from $0 per month.
- Custom interchange-plus pricing: The provider passes the interchange fee plus a small custom % and fixed fee (in cents) as markup from the payment processor.
- Standard interchange-plus pricing: Provider passes a set interchange fee plus a small % and fixed fee (in cents) as markup from the payment processor. There are no monthly account fees.
- Wholesale interchange-plus pricing: Often means high monthly account fees in exchange for wholesale interchange-plus rates.
- Tiered pricing: Custom rates that are separated in tiers based on card and transaction type.
- Free credit card processing: In some U.S. states, it’s possible to pass on the entire transaction fees to customers in the form of surcharging or convenience fees.
Benefits of point of sale system
There are many benefits in upgrading from a traditional cash register to a modern POS system. This includes:
Streamlined business operations
The automation built into POS software allows for a more streamlined business operation. It removes repetitive tasks such as manual data entry as well as sales and inventory tracking, so businesses can focus on strategies to improve conversion.
Efficient inventory management
With inventory integrated into the POS system, tracking product movement and levels is automated. The inventory count is adjusted in real time for every sale (or return), and you can set reorder levels to prevent selling out-of-stock items.
Better customer experience
A streamlined POS process prevents long wait times and provides multiple payment methods, resulting in a better customer checkout experience. This creates loyalty and builds the business brand that can attract more customers to the store.
Access to real-time, accurate business data
Another benefit of automating your POS process with a POS system is access to real-time and accurate business data. This allows businesses to project sales, determine which products are popular and which ones are left on the shelves, and more efficiently plan their investments.
Seamless payment processing
Integrating payment processing with a POS system provides businesses with the ability to generate accurate and timely sales reports. It also allows businesses to efficiently manage customer information, including purchase history, to analyze and predict sales trends.
Secured transactions
A POS system provides multiple layers of security to protect transactions. In addition to role-based logins and automatic software updates, the payment processing system is equipped with machine-learning fraud monitoring and protection tools that comply with PCI standards.
Challenges of POS systems
The following are common challenges that businesses encounter when using a POS system:
Choosing the right POS provider
With so many POS systems available on the market today, choosing the right one can be challenging.
Solution: Analyze your current business priorities and POS requirements, consider your budget, and then compare your shortlist of POS providers.
Scalability
Operational demands increase as sales grow and the business expands into new markets and channels. A basic POS system that costs very little to set up or maintain will likely be able to keep up with functionalities.
Solution: Choose a POS solution that offers upgraded features and integrations. Also, consider a system compatible with more advanced POS hardware and payment processors that provides volume discounts or better pricing models for larger transaction volumes.
Security
The downside of an integrated POS solution is that any successful unauthorized access leaves all POS data, including customer personal and payment information, vulnerable.
Solution: Before choosing a POS provider, evaluate how employees can access the system. Avoid POS software that does not include automatic security updates to protect against malware. Work only with at least level 1 PCI-compliant payment providers.