What is a POS system and how do businesses use it?

A point-of-sale (POS) system is a payment solution that combines software and hardware to facilitate transactions between customers and businesses. The system processes, validates, and completes payments at the time and place of a sale.

What is the purpose of a POS system?

A point-of-sale system integrates all transactions and customer data, helping businesses process payments, gather customer insights, activate special offers and discounts, and manage product inventory all in one place.

Benefits of POS systems

POS systems make customer experiences faster and make it easier to track sales. Their benefits include:

• Efficient in-person checkouts
• Many different payment methods that give customers flexibility
• Integration with modern payment security features to reduce credit card fraud
• Inventory management and store tracking
• Employee time and sales performance tracking
• Rewards and perks for customers

The features of a POS system make it particularly helpful for restaurants and brick-and-mortar stores. Cafes, for example, can use these comprehensive payment systems to send orders to their kitchens and track popular menu items. Retail shops can use POS technology to build customer databases and sales reports.

Not all businesses need the same POS capabilities, so it’s important to assess which systems have all the functionality to support current and future business operations.

How does a POS system work?

Point of sale is the physical point at which a retail transaction occurs. All point-of-sale transactions involve calculating a final total, accepting payment, and recording the payment details.

POS systems use combinations of hardware and software to perform these functions automatically. With this digital checkout technology, businesses can process contactless and secure transactions from almost anywhere.

This is how point-of-sale systems generally work:

1. Customers or staff enter purchases by scanning, weighing, or entering items manually
2. The system calculates discounts, taxes, and the total automatically
3. The system presents customers with the total and payment options
4. The customer confirms the purchase, chooses a payment method, and pays
5. The system performs authorization and security checks
6. The system approves and executes the transaction by communicating with payment providers
7. The system issues a receipt, then prints it or sends it digitally
8. The system records the transaction, updates inventory, and any other integrations

Point-of-sale example scenario

Leo owns a record store called Chairman of the Boards and uses a tablet POS. A shopper approaches the checkout counter to buy an album using her credit card.

Here's how this POS transaction would work from start to finish:

1. A sales associate scans or selects the specific album on the store's POS-enabled tablet.
2. The system software pulls up the album's price and adds sales tax, displaying the total amount owed.
3. The customer swipes her credit card through the card reader hardware, which uses software to send a payment request from the Chairman of the Boards record store to her bank.
4. The bank authorization is completed, and the record store's POS processes the payment.
5. With payment received, Leo's POS software automatically updates his inventory data to show that a unit of that item was sold.
6. The customer chooses to receive a digital copy of her receipt and provides her email address.
7. The system emails the customer her receipt, and the transaction is completed.

Payment methods supported by POS systems

Payment processing is one of the most important features of any POS. Generally, the payment methods that systems can facilitate include the following:

• Debit and credit cards
• Digital wallets
• P2P payments apps like PayPal and Venmo
• Contactless / tap payments
• QR codes
• Gift cards and points redemptions
• Cash
• Checks
• Card-not-present transactions (users manually enter card information)
• Online payments through an e-commerce site
• Financing applications

How to set up and use a POS system

Point-of-sale systems require some setup, but once a business has gone through the process, they’re extremely efficient. Here are the setup steps in order.

Step 1: Install and connect software

Stage: Setup

Depending on the system, POS software might come pre-installed on specialized devices or as a separate download. PayPal’s POS software is a free app for phones and tablets.

There are multiple types of POS system hardware, from specialized card readers to attachments for phones and tablets. Connect devices to the business’s POS account and ensure they’re updated.

Step 2: Integrate business systems

Stage: Setup

Now that the system is installed, connect it to other software in a business’s stack. This could include:

• Accounting software
• Inventory software
• HR and payroll software
• Data analytics
• Customer relationship management (CRM) software

Step 3: Input inventory into the system

Stage: Setup

The more organized a business’s inventory management is, the easier this step will be.

POS systems may allow users to upload spreadsheets or connect to existing inventory management software. If a business only sells a limited number of items or services, it might make sense to create the inventory manually.

Step 4: Create user accounts and store profiles

Stage: Setup

Create user accounts for employees and make sure to set permissions based on the type of role. Cashiers probably shouldn’t have the same permissions as managers.

A good rule of thumb is to provide each account type with the minimum permissions necessary to perform daily duties, and then users can escalate issues as they encounter them. This helps with security and ensuring employees operate within the scope of their job descriptions.

If a business has multiple stores, it can group accounts in order to track sales by location.

Step 5: Set up payment types

Stage: Setup

POS purchases can take many different forms, from cash to tap-to-pay. Set up various options to make it easy for customers to pay. Mobile POS devices are often best suited for card and mobile tap payments, but they can facilitate cash payments too.

Step 6: Customize business settings

Stage: Setup

Next, ensure that all the settings are correct:

• Tax rates
• Tip options and suggestions
• Employee discounts, veteran discounts, and other permanent discounts
• Assistance programs such as electronic benefit transfer (EBT) payments
• Types of currency accepted

This is also an opportunity to create custom messages, screens, receipts, communication sign-up pages, and post-purchase surveys.

Step 7: Train staff and test the system

Stage: Setup

Distribute documentation and training materials to managers and staff, and conduct in-person training. The POS provider may have materials and guides for organizations to help with onboarding.

Before rolling out the new system, perform some test transactions and give staff time to get familiar with it.

Step 8: Employees log in

Stage: Daily use

Employees should have their own accounts. This can help with security and time tracking. This is especially helpful for commission-based sales and performance tracking.

Step 9: Enter purchases into the POS

Stage: Daily use

There are many ways to initiate a POS purchase that depend on the business context:

• A store may use scales and a barcode scanner.
• A restaurant likely enters orders into the system at the time of order.
• Appointment-based services may use customer-initiated online booking, followed by a check-out after the service.
• At an event, the POS system might connect to a ticket printer.
• Users can also enter items manually.

Once users have entered purchases into the system, it performs calculations automatically.

Step 10: Customer completes payment

Stage: Daily use

Enter any additional information into the system and present the customer with the total. Customers will approve the purchase and then provide payment. The POS system handles all the approvals and processing.

POS systems allow customers to select whether they want physical or digital receipts. Receipts can be printed, texted, or emailed.

Step 11: Manage returns and refunds

Stage: Daily use

POS systems create records of transactions, which makes it easy to look up purchases. If customers have lost receipts, users can look up purchases using other information, such as the payment card.

Once users have confirmed a return or refund is legitimate, POS systems allow businesses to return money directly to customers’ accounts.

Step 12: Update inventory

Stage: Business management

POS systems can automatically update inventory data and integrate with e-commerce platforms. This helps businesses manage product availability in both online stores and physical locations.

Tracking sales and inventory data can help businesses identify fast-moving products and customize inventories at different locations to respond to local demand.

Step 13: Track store sales performance

Stage: Business management

In addition to inventory management, POS systems can provide critical performance data for teams and locations. This helps businesses identify locations that need support or teams that need additional training.

Step 14: Manage employee time and performance

Stage: Business management

POS systems with employee logins help track time and provide performance incentives. Businesses can ensure that employees are spending the expected amount of time logged in and performing customer-facing tasks.

Tracking sales by individuals, especially in commission-based environments, can help provide incentives and celebrate team member wins.

Types of POS hardware

A POS typically consists of both POS hardware and software. While every POS solution requires software, not all businesses may need dedicated hardware. For example, some businesses might opt for cloud-based or mobile POS that are accessible through smartphones or tablets.

Businesses can choose from a range of hardware options, including:

• POS registers: A Wi-Fi-connected POS cash register can help the business process transactions, accept different payment methods, and track sales data.
• POS terminals: These portable, all-in-one devices not only process different payment methods but also print receipts, accept tips, calculate taxes, and provide refunds.
• Tablets and monitors: Connected devices — like POS tablets and iPads — provide user-friendly, touchscreen interfaces for employees and shoppers while enabling checkout from anywhere in the establishment.
• Credit card readers: EMV card readers allow customers to quickly make purchases with a swipe, tap, or chip-enabled credit card securely.
• Receipt printers: For shoppers who prefer printed receipts over emailed receipts, dedicated receipt printers can fulfill their requests.
• Barcode scanners: With a barcode scanner connected to the POS, a customer or employee can pull product and price information instantly. Advanced barcode scanners will also support specialized scans, such as QR codes, for contactless checkout and redeeming special offers.
• Cash drawers: Customers who don't want to pay digitally or with a credit card should still have a fast option to make their purchases securely. Connected cash drawers can help protect the business's money and keep cash payments organized.

Types of POS software

POS systems run on software that enables connections between systems, devices, and payment processes. Common POS software integrations and types include:

• Pricing and checkout: The core functionality of POS software logs items or services for purchase and automatically calculates the final total, including taxes, tips, and promotions. Then it generates receipts for printing or digital delivery.
• Contactless payment processing: Securely accept payments from digital wallets and chip-enabled cards, making checkout quick and easy for shoppers.
• Inventory management: POS systems can connect to inventory systems and automatically update them as customers make purchases. This can provide managers with insight about popular items, help plan delivery schedules, and keep customers informed about availability.
• Rewards and customer engagement: Businesses can deliver rewards through POS systems, for example, encouraging customers to enter their phone numbers for reward points. The systems can manage points programs, frequent customer discounts, and promotional codes.
• Credit applications: If a business has a store credit card offered through a bank, they can add the application process to POS systems. This makes it easier for customers to apply for credit cards at the time of purchase, which can help to sell high-priced products.
• Financing and P2P integrations: POS software can integrate with payment solutions such as PayPal and other P2P providers, as well as POS financing options to give customers more flexibility.
• Accounting integrations: One core advantage of POS systems is automated purchase tracking to make accounting easier. Purchases can be exported into accounting software for tax reporting and internal financial reporting.
• Data reporting: Access detailed reports about purchase trends and customer behaviors. Use these insights to create smoother customer experiences.

POS features by industry

Different industries often require different types of POS systems, hardware, and software integrations.

Specific needs also depend on the size of a business. POS systems can be as simple as a phone card reader for a family business or a system of specialized terminals for multi-location brands.

POS for restaurants

Restaurants need to track food and drink orders, tying multiple orders to a table and coordinating timing between different teams (kitchen, pastry, prep/salad, and bar).

POS systems for restaurants can help manage this by generating tickets when a customer orders. Once the order is in the system, it can be sent to the right location, accounting for timing and order priority.

The system can keep track of all the orders at a table. When it comes time to pay, staff can assign ordered items to different bills or split bills.

POS for retail

Retail locations may need different methods of entering items for sale, including:

• Scales for weighing produce and bulk goods.
• Barcode scanners.
• Manual item entry.

Retail locations need streamlined, efficient checkout experiences to keep locations running smoothly. This assists with accuracy, wait times, and staff training. With more and more people carrying cards, not cash, learning how to use POS systems is critical for even tiny, family-run retailers.

POS for e-commerce

POS systems focus on in-person transactions, but many businesses run hybrid operations with online and physical stores. A POS system can connect these storefronts to ensure data is centralized.

POS for appointments and bookings

POS systems can help service providers make the booking process more efficient. In addition to taking bookings over the phone, they can connect POS systems to public-facing online calendars and have customers request specific services ahead of time.

Then, once the appointment is complete, the service provider can ring up the existing booking. An automated booking system allows business owners to focus on serving customers rather than managing calendars.

Streamline small business operations with PayPal’s POS system

POS systems help businesses streamline daily operations, track inventory, and use data to make better decisions.

PayPal’s small business POS systems help business owners focus on serving their customers. With multiple payment options and efficient checkout experiences, they make business easier, from small produce markets to mobile pet grooming.