Unlocking the power of new payment technologies and POS equipment for your small business

What a change a few years makes. Today, less than 10% of all transactions are made with cash, according to the Federal Reserve Bank of San Francisco. Credit and debit cards are the most common form of payment, but virtual and digital payments are accelerating quickly. Merchants want the tools to accept every form of payment to generate revenue.

When it comes to processing payments, though It’s a delicate balance. You want to process payments as quickly as possible to provide the best possible customer experience. At the same time, you want to implement a cost-effective solution that provides you with exceptional fraud protection.

Today’s payment processing solutions continue to evolve to meet these goals and provide merchants and customers with options for secure, seamless transactions.

Making the best decisions about which POS systems and payment processing providers to use can be challenging. There are plenty of choices and decisions to make about which features and systems are right for your business. This guide is intended to provide you with the knowledge you need to make a more informed decision about payment gateways, POS systems, magnetic stripe readers, chip card readers, and contactless payments. We’ll explain the various aspects of each component of the payment process to help you improve customer experience, streamline your digital payment services, and grow your revenue.

Payment gateways

Payment gateways act as a conduit between customers and merchant banks. In store, POS systems serve as payment gateway, facilitating credit card and mobile payments. In eCommerce, payment gateways are coupled with checkout portals. Customers enter their payment information or credentials to make purchases.

You can think of payment gateways as a virtual terminal, but they provide customer-facing services to integrate with your payment processors. They can be physical devices in stores or accept online payments. Once customers pay, the payment gateway transfers the data to the merchant’s bank for processing.

Choosing the right payment gateway

Choosing the right payment gateway for your business is an important decision, especially for high-volume eCommerce sellers. A Baymard Institute survey reported that 17% of customers that abandoned their online shopping carts said the process was too complicated or too long. Another 18% said they weren’t sure they could trust the site with their credit card information.

Making sure you choose the right payment processing solutions for your business is crucial to establish trust, streamline the checkout process, and reduce cart abandonment.

Many companies choose to use multiple payment gateways, especially if they are selling-cross border. One survey showed that nearly half of global businesses use multiple solutions. Some use six or more. This can create significant technical debt, challenges with data transparency, and run up unnecessary fees.

Different types of online payment gateways

There are three different types of online payment gateways businesses can use. Which one is right for you may depend on the type of business you run, the volume of transactions you process, and whether you have the time or resources available to develop and manage an on-site solution.

Front-end checkout

Front-end gateways enable the customer to enter payment details while the payment processing happens on a separate system. Card details are encrypted, but the business does not have complete control of the payment process.

Redirects

A redirect gateway sends customers to a third-party site to complete their transactions. The external site will manage the collection and transmission of payment details, typically providing advanced security controls. However, this requires customers to take an additional step to complete a purchase. Some customers may also be concerned about having to leave a business’s checkout page to enter card information.

On-site

An on-site payment gateway allows customers to complete transactions within the business’s website. This streamlines the process for customers and keeps full control of the checkout process by sellers. While businesses choosing on-site solutions are responsible for implementing security to protect customer data, transactions occur more quickly and provide a seamless customer experience.

Payment gateway costs

Depending on the payment gateway you choose, you may have to pay fees for:

• Setup
• Monthly gateway service
• Individual or batch transactions
• System integration
• Closure

Small and medium-sized businesses (SMBs) concerned about their budgets also need to consider the cost of integrating a payment gateway. Some payment gateways will have additional charges for integrating and customizing features for your website.

Payment gateway integrations

There are also several types of payment gateway integration options.

Local bank integration

Businesses can redirect customers to payment processors through a bank. Customers enter their information and are returned to the business site. However, most integrations do not allow customers to handle returns or set up recurring payments.

API-hosted

Application programming interfaces (APIs) provide the highest level of control. APIs allow businesses to customize every aspect of the payment experience. Businesses must manage and secure customer data, taking on the extra burden of compliance with PCI DSS and SSL certification.

Self-hosted

Self-hosted payment gateways can be used to blend checkout seamlessly within a website to maintain branding while not requiring customers to be redirected to another page. However, self-hosted gateways also require technical support from internal teams.

Hosted

A fully-hosted payment gateways are highly secure. Security is handled by the payment processing service provider, but businesses may not have total control over the appearance or structure of the payment page when customers go through the checkout process.

POS systems

Point-of-sale systems process customer payments. Physical stores use POS devices or payment terminals while online stores have payment portals. POS systems include the hardware and software needed to handle customer payments and track sales data.

Yesteryear’s cash registers are obsolete with today’s POS systems handling cash, cards, and contactless payments.

Types of POS systems

There are seven different kinds of POS systems to fit any business model and may be used in combination.

1. Terminals: These are the traditional retail POS systems that include hardware and software, barcode scanners, cash drawers, and card readers.
2. Mobile: POS apps allow businesses to collect mobile payments. These are common in service industries or companies that move around and are also used in restaurants and retail.
3. Tablet: POS systems can work on tablets, paired with barcode scanners and cash drawers for a mobile solution, such as tableside at a restaurant or allowing retail associates to process payments anywhere in the store.
4. Cloud-based: Cloud POS systems can accept payments from nearly any connected device and allow secure online access to customer data.
5. Self-service kiosks: Kiosks are increasing in popularity, especially in quick-serve restaurants (QSR), enabling customers to make purchases and payments without employee interaction.
6. Multichannel: Multichannel systems can handle payment processing and integrate customer data and sales reporting from different platforms, such as multiple physical locations and online stores.
7. Open-source: It is possible to build your own POS software or hire someone to do it for you, but it can be expensive and businesses will be responsible for maintenance, updates, and security.

Which POS system is right for you will depend on the type of business you run and how you want to operate. For example, restaurants may want to enable tableside payments rather than having to wait in line to pay. Stores might prefer retail POS software to integrate loyalty or membership programs and customer data tracking.

POS system features

Modern POS systems have robust feature sets that help you do much more than just process payments. Some of the more common applications include real-time reporting, inventory management, and customer relationship management.

Real-time reporting

POS systems can track sales data and generate real-time reports, providing insights into sales performance, patterns, top-selling items, and margins to help with decision-making.

Inventory management

Another key feature is inventory management to track stock levels. As items are sold, inventory counts are automatically updated and alerts are provided when stock needs to be replenished. Some systems provide exceptional granular data, such as tracking individual ingredients used in recipes. This allows you not just to track inventory levels, but also manage profitability for each order.

Customer relationship management

POS systems can integrate with membership/subscription programs or customer loyalty programs. This makes it easy to track customer purchases and offer personalized rewards, incentives, or promotions.

Receipts and invoices

POS systems can generate invoices and receipts, automatically adding the appropriate tax and accommodating tips. Each receipt or invoice will be individually numbered for easy tracking. Electronic copies can be stored for fast retrieval.

Scheduling and time clock

Some POS solutions also provide staff scheduling, table assignments, and other tools to help manage employees and operations. Staffers can clock in and out electronically with information seamlessly flowing into payroll processing systems.

Magnetic stripe readers

While magnetic strips on credit cards are slowly decreasing in favor of chip readers, you still need to process cards with magnetic stripes as part of your credit card payment services. Whether cards are swiped or inserted, POS machines incorporate stripe readers and allow cashiers to use them or function as self-service devices for customers.

Limitations of magnetic stripe readers

While magnetic stripes have served the industry well, there are limitations to these devices and technological advances that make other options more attractive for the future.

Proximity

Magnetic stripes require close physical contact between the card and the reader. Customers must swipe or insert cards into a payment terminal, requiring precision positioning. Newer near-field technology (NFC) allows contactless payments.

Wear

Magnetic stripes can wear out. Frequent use and inadvertent damage to the stripe can lead to card failure, preventing customers from completing sales. Stripes are not as durable as chips embedded in the card or NFC-enabled cards.

Security

Although magnetic stripe readers represented a major security advance from prior card tech, they are unable to produce the advanced encryption and counterfeit protections that chip readers and contactless devices can.

Magnetic stripes are being phased out, but not for years

Magnetic stripe technology is now more than 60 years old and has been a mainstay throughout nearly all of that time. However, its time is coming. Mastercard, for example, has publicly announced that they plan to begin phasing out magstripe cards in 2024 with a goal of eliminating all of them by 2033. Visa says it has no current plans to eliminate magnetic stripes.

Even as Mastercard plans to phase out magstripes, it noted that there is no plan to remove them from prepaid cards.

So, it will be years before magnetic stripes are no longer in use. Data from American Express, Discover, JCB, Mastercard, UnionPay, and Visa — compiled by EMVCo. — show that 93% of global transactions today are made using EMV chips. Interestingly, adoption is only at 87% in the U.S.

Still, merchants will need to facilitate both chip and magnetic stripe transactions for the foreseeable future.

Chip card readers

It’s taken decades for chip reader technology to catch on and become the industry standard for payment processing. It required replacing existing POS systems with card readers that could handle the EMV chips.

One of the key features of chip card readers is that they are significantly more secure. When chip cards are inserted into devices, the reader scans the card and generates a unique code for each transaction. The actual credit card number is not transmitted, and the codes used to process transactions are dynamic. Even if hackers were to intercept the codes, they would have an extremely difficult time accessing customer data.

Customers also have to authorize the payment by confirming the payment or inputting a PIN before the information is transmitted to the merchant bank to finalize the transaction.

Advantages of chip card readers

SMBs that accept credit card payments enjoy significant benefits for chip card readers.

Fraud reduction

Credit fraud results in more than $32 billion annually, according to Statista research — with more than a third occurring in the United States alone. Chip-embedded cards are significantly harder to counterfeit. The algorithms in the chips are complex and generate dynamic codes, which have made it nearly impossible to clone.

With magnetic stripe cards, hackers could insert skimmers that captured card details. With chip cards, skimmers can only see the unique code, which is only used for a single transaction. By comparison, magnetic stripes cards used the same data for every transaction.

More durable

Chip cards are also significantly more durable and less likely to be damaged by heat, moisture, magnets, or general wear and tear. Internal chips are less likely to fail.

Flexible payment options

Most modern chip card terminals also provide multiple options for payments, allowing customers to use their payment of choice. For example, by tapping or waving their card in front of the device, they may be able to pay without inserting the card.

Chip card readers also are more flexible when it comes to payments. Modern POS devices also accept other payment services, such as Apple Pay, Google Pay, Samsung Pay, and others.

Dual interface

Systems also have a dual interface, handling both chips and magnetic stripe cards. This also helps future-proof devices as consumers turn to alternative methods of payments or stop using magnetic stripe cards altogether.

Contactless payments

Tapping or waving cards to avoid having to make physical contact with devices has been around for a while now, but started to become mainstream during the pandemic. Contactless payment solutions are fast, easy, and secure.

Most major retailers now deploy devices that accept contactless payments as part of their payment processing solutions, allowing them to accommodate a wider variety of payment options. It’s not surprising that the global payments market is valued at $34.55 billion in 2023, according to Precedence Research, and is expected to grow to $132.4 billion by 2032.

Contactless payment options, including handling smartphone and wearable device applications, are becoming more common. Mastercard reports that contactless payments make up half of all in-person payments made globally. Retail, transportation, healthcare, hospitality, and other industries are some of the fastest adopters of contactless solutions.

A J.D. Power study showed the increasing use of digital wallets on smartphones to pay for purchases as well. As of the end of 2022, it was reported that 49% of Americans had used a mobile wallet at some time in the past three months. Usage is significantly higher among some demographic groups, especially among younger consumers.

Benefits of contactless payments

There are also significant benefits for merchants and customers when using contactless payments

Faster transactions

Transactions occur much faster, allowing for shorter lines at checkout and reducing wait times. Customers avoid delays while merchants can facilitate more transactions in a shorter period. Customers can tap or swipe and go, even in busy times.

Cost-effective payment processing

Contactless payments utilize the same merchant processing rates and fees as other common payment methods like chip cards or magstripe cards. By adding contactless, businesses do not incur any additional costs or equipment expenses beyond their normal payment processing.

Enhanced security

Contactless payments integrate robust security protections including encryption of payment data and tokenization where payment details are replaced with secure tokens. This helps safeguards customers and merchants against fraud for greater peace of mind.

Improved health and safety

The pandemic made everyone much more conscious of public health concerns. Contactless payments avoid having to touch payment terminals or exchange cash. The touch-free experience provides a cleaner and safer way to pay for both customers and employees.

Customers want the option of going touchless. A Visa study reported that nearly two-thirds of customers want touchless payment solutions wherever possible. In light of lingering health concerns, 49% of consumers surveyed said that offering contactless methods is “one of the most important safety measures stores can offer.”

Greater mobility

Contactless technology enables small businesses to accept payments anywhere using affordable portable terminals. Payments can be taken at farmer’s markets, delivery jobs, and other settings outside a traditional store. Mobility empowers businesses to sell whenever and wherever opportunities exist.

Drawbacks of contactless payments

There are some drawbacks to consider when adopting contactless payment technologies. Some countries, states, and merchants place limits on the amount of transactions. Limitations are generally implemented to prevent fraud, but this might cause problems for customers who hit those limits.

Some customers and businesses also have concerns about contactless payments. If someone steals a contactless card or has access to a digital wallet on a user’s smartphone, they may be able to complete transactions without authorization. However, these concerns are rapidly diminishing as code features and biometrics are evolving.

Conclusion

As the world becomes more digital every day and cash-based platforms become less reliable, businesses must keep up with the latest digital payment systems to meet customer demand and future-proof their business.

Merchants evaluating POS systems and payment processing providers need to have a clear understanding of their needs and customer expectations. You want a system that provides the flexibility and options that customers want, helping you work more efficiently, and providing secure transactions to reduce fraud.

Sekure Payment Experts can help. With deep experience in the digital payment industry, our team of experts can consult with you to make sure you are making the best decision. The right payment system can significantly reduce your costs and improve the customer experience.

Contact Sekure Payment Experts today and discuss your payment processing and POS system needs.