In the old days of running a small business, you accepted cash, or maybe a check, in exchange for your products or services. Today, payment processing is—to put it lightly—a more complicated transaction, and you have lots of options for getting it done.
If you have a brick-and-mortar business, you can just accept cash—but you’ll miss out on valuable credit card transactions, which are growing more popular (and expected by consumers) by the day. If you want to offer customers a robust set of payment options while also giving your business insight into customer loyalty and other metrics, you’ll need another tool (like Fivestars). And if you have an ecommerce business or arm, you’ll need help from yet another party.
Because the merchant services space is convoluted, it would take forever to run through every possible combination of payment processing. Small business owners with brick-and-mortar shops have a bit of a simpler decision to make: Do they need a robust point of sale system, or just a payment processor?
Let’s break down the differences between a POS and a payment processor, why you might want one option over the other, and your best choice for the long haul.
What is a payment processor?
A payment processor has become a catchall term for many different parts of the payment process. At its core, it is a third-party company, appointed by the merchant or small business, to handle the transaction of debit and credit card payments by customers.
When a customer inserts their card into your credit card terminal, it takes your payment processor just a few seconds to mediate between all the various financial institutions involved in the transaction. There’s the customer’s bank, the credit card network, your merchant account, and there may be other parties depending on what payment processor you use and whether you are processing a purchase in store or online.
All of these interactions must be done securely, reducing the possibility of fraud by any party, using point-to-point encryption or tokenization.
Payment processors have to take extra steps when dealing with an ecommerce sale, such as interacting with the business’s payment gateway. But if your transactions are all in store, you can settle for a basic payment processor with a credit card terminal that reads cards with an EMV-chip reader and is PCI DSS compliant.
What is a point of sale system?
Point of sale is another term that has come to mean many things to many people. A point of sale system (often shortened to “POS”) is, at its core, a combination of hardware and software that a business can use to process transactions.
Your point of sale could either be your cash register or the payment page on your website. A new era of POS systems have replaced the old-school cash register. Many come with software that integrates with your inventory management software and your loyalty program, among other features.
A POS system is not a payment processor, but payment processing is often bundled with the POS as part of its offerings. The most basic tenet of a POS system is that it can handle in-person, as well as online, payments. From there, various POS offerings include a variety of additional features, including:
- Transaction management: This includes printing and/or emailing or texting receipts, and a user-friendly tipping interface.
- Inventory management: An easy-to-navigate inventory database, so employees can ring up transactions and check to see how much of a particular item is still in stock, is increasingly commonplace. You can also use some systems to remind you to reorder inventory, or to actually complete reorders on the spot.
- Reporting: Data is an important resource to small businesses, and many POS systems provide all kinds of data such as sales figures, product profitability, employee performance, and more.
- Employee management: From time clock systems to commission and tip reconciliation, your POS can be employee-facing as much as customer-facing.
- Customer relationship management: Run your loyalty program through your POS in order to have customer history at your fingertips.
Therefore, a POS system can process payments with all kinds of hardware and software additions. Some POS systems are better suited for retail businesses, while others are outfitted for restaurant needs, and so on.
Which is better for your small business?
The question of whether it’s better to opt for a standalone credit card reader to process your payments, or a more complex and powerful point of sale system, depends on your small business needs.
The pros and cons of each are straightforward. You will pay less for a simple payment processor that just runs credit cards, but as a result you will have fewer features available to you. POS systems are chock-full of excellent features, but you will pay more for these capabilities, and it won’t always be clear why a more expensive POS system is a superior product to its competitors’.
If you have a brick-and-mortar business, with no plans to expand into the world of e-commerce, and have no interest in perks like employee management, or customer relationship management, a simple payment processing service that just runs cards is a fine option.
You often see standalone credit card readers at local small businesses like liquor stores and small groceries, where the extra costs of a POS system aren’t worth it, according to the business owner. These are small, often family-owned businesses or businesses of one where the owner knows their market, and they don’t need to induce repeat visits, or manage a time clock fastidiously.
If you have your eye on expanding your back-end capabilities and want an all-in-one solution—software and hardware that processes credit card payments, contactless payments, and online payments, as well as managing inventory and running reports—then a POS system is worth the investment.
In this scenario, the business owner runs a business that they want to scale (a coffee shop, a bookstore, a gift shop), potentially into a business that sells via multiple channels or expands into multiple locations. Being able to manage inventory, employees, and customer profiles across these locations makes a robust POS system a worthy investment, because otherwise they will lose money in all these areas.
The main sticking point, then, is price. Here’s how to break down price considerations:
Payment processing fees
Whether you use a dedicated payment processor or a POS, you will have to pay to process credit and debit cards. Different processors use different methods for calculating their cut and use different variables that can affect price, such as transactions per month.
Most in-person transactions are charged interchange pricing, which is a small percentage of the payment. For ecommerce transactions, you’ll pay interchange-plus, which is that small percentage plus a flat fee.
Note that even if you opt for a POS system over a dedicated payment processor, you’ll still have to pay processing fees—and some POS systems will require that you use their in-house processor to use their software and hardware. There is little wiggle room here in terms of prices.
If you go with a POS system, you’ll need a piece of hardware that can read credit cards. This might be as small as a smartphone add-on, or as large as a countertop register.
Each POS system provider charges different amounts for their hardware. Some might give you hardware free upon signing up with them, while others will charge you a lump sum of hundreds or over a thousand dollars. Note that if you’re getting your hardware cheap or free, you’re likely paying for it another way, usually via software.
Finally, you’ll either pay a monthly fee or an upfront lump sum to use your POS software and all the features you’ve opted for. Tiered plan options allow you to pay more on a monthly basis in order to lower your processing fees—a good bet if you have a high-transaction business.
If you’re a small business owner looking to stay competitive in the years to come, it’s hard to ignore the perks of investing in a quality POS system. Doing so gives you the ability to scale up seamlessly, without worrying about switching providers or buying additional equipment. Just contact your POS provider and get the new capabilities you need.
There are lots of benefits to a digital and all-in-one marketing program (rather than the old punch card system). New tipping systems encourage people to tip more and more often, which is better for employees. And data about product profitability and employee performance can help you identify which parts of your business need improvement.
A standalone credit card reader, on the other hand, lets you accept credit and debit card payments. You’ll no longer miss out on a crucial (and growing) subset of shoppers who don’t carry cash, but that’s about it. It’s the bare minimum you can do to change with the times. For some business owners, that’s enough.
Consider the needs of your business, from what your customers expect to what you can afford—and make your decision based on what makes sense for you. When you do that, you can’t go wrong.