Point-of-Sale Terminal: What it is and How It Works

What Is a Point-of-Sale Terminal?

A point-of-sale (POS) terminal is a hardware system for processing card payments at retail locations. Software to read magnetic strips of credit and debit cards is embedded in the hardware. Portable devices (i.e., not terminals anchored to a counter), either proprietary or third-party, as well as contactless capabilities for emerging forms of mobile payments, represent the next generation of POS systems.

How a Point-of-Sale Terminal Works

When a credit card or debit card is used to pay for something, a conventional point-of-sale (POS) terminal first reads the magnetic strip to check for sufficient funds to transfer to the merchant, then makes the transfer. The sale transaction is recorded and a receipt is printed or sent to the buyer via email or text. Merchants can either buy or lease a POS terminal, depending on how they prefer to manage cash flows. Buying a system involves higher upfront costs while leasing levels out monthly payments, though total lease payments may end up being more than a one-time purchase over the useful life of the system.

The current trend is away from traditional proprietary hardware and toward software-based POS systems that can be loaded into a tablet or other mobile device. To stay ahead of the curve, POS terminal makers are introducing their own versions of portable and mobile POS devices.

Such devices can be seen at busy retail stores and restaurants where owners are cognizant of the fact that customers generally do not like waiting around to pay for a product or meal. Price, function, and user-friendliness are important criteria for POS system purchasers. Extremely important in the growing interconnected world is the security of the systems. Some high-profile hacks of customer data have occurred through POS terminals that did not have updated operating systems.

Point-of-Sale (POS) Terminal Pioneers

The first point of sale system was developed by the National Cash Register (NCR)—the company responsible for a majority of cash registers in the world today. The company integrated new technology, such as bar codes and scanners developed during the 1980s, to convert manual cash registers into mobile sale systems.

Square, Inc. has been an innovator in the PoS space in recent times. It introduced hardware and software "to transform the checkout process and advance digital and mobile commerce by untethering sales from long lines and antiquated cash registers," according to the company in its Form S-1 filing.

Its systems interface directly with the payment card networks, lifting the burden of maintaining compliance with rules and regulations of the payment industry off the shoulders of merchants. Business analytics in the company's POS systems is also another attractive feature. However, this is a field with relatively low entry barriers—Square may have been the pioneer, but there are many competitors.