What is a POS system and how does it work?

It doesn’t matter whether you run or plan to open a coffee shop, restaurant, retail store, or hotel. Ultimately, your primary aim is to sell a product or service and get paid for it. If you’re new in the business world, you might have heard the word “POS” being thrown around.

But what is a POS system, and what does the term stand for? We look at these questions in this blog post to help you understand this critical requirement for any business.

Ready? Let’s take a closer look.

What is a POS system?

In short, the acronym “POS” stands for “point of sale” or “point of purchase”. The POS system is the place where a sale is being executed. In a shop, this can mean your hardware and your software combined in such a way that enables you to accept payments.

These hardware and software components can include a cash register, a barcode scanner, a POS terminal to accept payments, cloud software to help you organise your inventory and customer relationship management, and more.

What are the origins of POS systems?

The original point-of-sale POS system, as we know it today, was not what it was when it first came to the market 20 years ago. It was initially a cash register that helped improve accounts and bookkeeping functions at various retailers in the US.

Since then, LCD displays and touchscreens, magnetic stripes, and computer or cloud-based technology have come to the fore, although James Ritty of Ohio in the US is credited as being the first individual to create the cash register over a century ago, ultimately beginning today’s POS systems.

History of POS systems

The modern POS system differs significantly from the good POS system of the past. 

After the invention of the first cash register in 1879, users were able to record transactions quickly, easily, and with zero errors. Once the potential of this invention was recognised, James Ritty was able to sell it to the National Cash Register Corporation (NCR). 

The NCR made improvements to the solution by adding cash drawers and paper rolls for the production of receipts. The cash register became an internet-enabled device by the mid-1900s, geared with thermal printing, magnetic strips for credit and debit cards, and an LCD screen.

In 1973, IBM launched their first restaurant POS system, paving the way for modern POS systems. Thanks to the electronic cash register, restaurant owners were able to use remote printing to relay orders to the kitchen in an instant. 

At the same time, customers would receive a meal receipt with tax included. At this stage, 30 seconds were necessary to complete a credit card transaction as one of the popular payment options. 

A quicker speed was achieved in 1986 by Gene Mosher, who invented the first graphic touchscreen interface. This innovation was further developed by Microsoft in 1990. The company launched their first commercial POS system for restaurants.

Today, cloud-based POS systems dominate the scenes and attract the most attention among merchants.

How does a POS system work in practice?

It’s relatively simple. Your customer chooses an item they would like to purchase, arrives at the point of sale, calculates the total cost of the sale, and hands you a debit or credit card or cash, although this is quickly becoming an outdated method of payment. The transaction is then processed, and your payment is eventually complete. 

It’s worth noting that the payment can be processed via a range of different methods.

These include the following:

• Cash payments;
• Secure online payments;
• Magstrip credit cards;
• Chip cards;
• Contactless payments;
• Mobile payments via mobile devices or digital wallets like Apple Pay and Google Pay.

Which businesses is the POS system designed for?

Although initially developed for restaurant businesses, the right POS system can help transform businesses in a range of different industries. 

Some of the businesses that the POS system is suitable for include:

• Retail industry – For retail businesses, POS systems can offer capabilities related to loyalty programs, a quick and flawless transaction process, discounts, and more. For example, POS systems are popular for travel agents, shops (for both in-store and online sales), and trade shows. 
• Hospitality – The hospitality sector is another one that can greatly benefit from the POS system. We already mentioned restaurants, but other businesses that can take advantage are bars, coffee shops, travel agencies, hotels, and more. 
• Trade – Builders, plumbers, and other similar professionals can organise their business data through the help of POS systems. All they need is a POS app and an internet-enabled device. 

These industries are only a few examples of the businesses that the POS system was designed for. 

4 benefits of implementing a POS system

Now that you know what POS stands for, it’s time to look at some benefits it offers for your business: 

A positive effect on your company

Knowledge is power, and the more you know about your business, the better. Therefore, a POS system can come in handy. It can help you track sales, inventory, and total payments received.

This will enable you to keep track of stock, decide when you need to boost your inventory, determine which items are made for the most popular buys, and how much profit you made off them.

Improved analytics and planning

Back to inventory again: a POS system helps you keep track of it effectively. You’ll also be able to pick up on any trends in the sales process, analyse your incoming data, and better predict any future trends related to your business.

Increased business efficiency

Features like barcode scanners and credit card readers can help you improve your business’ efficiency. Barcode scanners, for example, can help you figure out which stock is selling faster than the others, ensuring you have enough on stock.

Meanwhile, a credit card reader can help you improve your business efficiency by enabling you to accept card payments easily, providing a modern and hygienic process that your customers would enjoy.

Improved client communication

Your customers are the lifeline of your business, and you need to treat them well in order for them to be returning clients. At the point of sale, you can collect their information, such as email addresses, names, and dates of birth, and tailor your upcoming offers, discounts, or sales. They’ll not only feel like valued customers, but that they have an incentive to shop at your store.

POS system technology

Acknowledging and assessing the technology behind POS systems is key to understanding how they work in detail. 

In short, POS systems consist of hardware and software solutions. 

The system’s hardware components include a terminal, cash drawer, receipt printer, barcode scanner, card reader, and customer display. 

On the other hand, the software elements feature a POS app that is responsible for transaction processing, sales management, inventory tracking, and reporting. 

Here’s a more in-depth explanation of these two components.

POS software

If you run an ecommerce store, you’ll definitely need POS software for your system. This will help you integrate the online solutions correctly into your store, and you’ll be much better equipped to accept payments from anywhere.

When it comes to software, make sure you choose a provider who offers you flexibility, affordability, ease of use, and constant customer support, and value-added features. 

If you don’t have an online store, you’ll still need POS software for your business. This can come as apps such as a cash register app that helps you keep track of sales.

There are also hundreds of third-party apps available for you to manage your business well. All you need to do to use the software is to either sync it with your card terminal or POS device or integrate it with a tablet, smartphone, or computer.

The choice of the best POS software will ultimately depend on your business and requirements.

POS Hardware

Some of the essentials related to the hardware of a POS system are:

Barcode scanner

Your barcode scanner can significantly ease your business operations and help you manage your inventory. You can integrate such scanners with additional software for optimal results.

Cash drawer or cash register

While there’s been a trend towards going cashless, you still need to be prepared for cash sales. This is why you’ll need a cash drawer to keep all incoming payments safe. 

Receipt printer

Most times, printing receipts and invoices is a regulatory requirement and you’ll want to ensure that your ePOS system enables you to do this. Sometimes, you can print a receipt through your credit card reader, which is discussed in more detail later on.

Monitor

A monitor’s purpose is to show the product database, and it also helps with managing staff through clock-ins besides helping you view sales reports.

Credit and debit card reader

This is an essential feature of such a system since an increasing number of consumers are making payments using contactless, magstripe, or Chip&PIN cards. Keep in mind that some card readers can function both as a barcode scanner and a debit/credit card reader.

How the traditional payment terminal has transformed into a powerful business tool

Over time, the classic payment terminal has undergone substantial transformation. In today’s dynamic business environment, it’s rather a multi-layered business tool that offers diverse functionalities. 

This was made possible predominantly thanks to integrations with POS systems. As a result, business owners and customers can enjoy a seamless shopping process with powerful transaction processing and data synchronisation. 

Manual entry is no longer a must, allowing businesses to reduce the chances of errors and lengthy procedures.

In addition, POS systems can now take control of sales data, inventory tracking, and reporting. They also record customer data, information on loyalty programs, and more. This creates new and exciting opportunities for marketing based on individual preferences and higher customer satisfaction rates. 

Moreover, a POS system’s features allow businesses to support and accept diverse payment methods, such as contactless payments, mobile wallets, and QR code payments. 

The cloud-based functionalities of these systems also enable remote management and scalability to unmatched levels. 

All of these functionalities make POS systems a business management tool rather than a simple payment option.

Questions to ask when choosing a POS provider

If you’re ready to purchase a POS system, you’ll need to do some prior research.

Here are some important questions you need to ask when choosing a payment solutions provider: 

• What is the total cost of the POS system?
• What type of hardware is required for the system to function optimally?
• Can the POS system integrate with your existing software? 
• What are the main payment methods which such solutions can accept?
• Are there any hidden monthly fees or annual fees?
• Is a binding contract necessary or can you pay on an as-you-use basis?
• Will you get an instant settlement of all accepted funds?
• How will you access funds which are accepted – will there be a free business card?
• Will you have access to a merchant account with a free IBAN?
• What kind of customer support can you expect to receive? Is there phone support you can count on?

Final thoughts

Getting a POS system for your business will be a worthwhile investment, as this is a fundamental aspect of accepting payments. The core of your business revolves around receiving payments for products or services offered, and you need to consider offering your customers convenient ways of paying you.

Once you’ve asked your payment solutions provider the questions mentioned above, you’ll be in a better position to make a more informed decision because you’ll already know what is a POS system and how it works.