Credit and debit card customers often see transactions on their statements described as "point of sale" transactions. Point of sale (POS) refers to the terminals used by many vendors to collect credit and debit card information when customers make purchases. Many stores use POS machines alongside or instead of traditional cash registers.
In 1974, the National Automated Clearing House Association (NACHA) was formed when regional clearinghouse associations from California, Georgia, New England and the Midwest merged. The association wanted to find alternative ways for banks to transfer funds electronically because check-clearing times were slow. In 1978, the NACHA expanded its reach across the U.S., and banks in all 50 states began to use Automated Clearing House (ACH) payments to transfer funds. Realising the potential for expedited funds transfers, banks began issuing automated teller machine (ATM) cards with the Visa logo on them. In the 1980s, retailers began installing POS machines that could accept ATM debit cards and credit cards.
POS machines feature a thin slot through which customers slide the magnetic strip of their debit or credit cards. Magnetic strips contain account information which the machine reads and transmits through a telephone connection to the financial institution that issued the card. Retailers type the amount of the transaction into the machine and the customer's bank approves or denies the transaction. Most POS machines have keypads on which cardholders enter their personal identification numbers (PIN). POS terminals also print receipts that require customer signatures when PINs are not used.
Customers benefit from the presence of POS machines because they enable customers to carry less cash. If debit or credit cards are lost or stolen, Regulation E limits cardholders liability for fraudulent charges, whereas lost cash cannot be replaced.
Merchants attract more customers by installing POS machines because of the fact that most people are wary of carrying significant amounts of cash. Merchants selling big-ticket items like cars receive immediate payment with POS machines, unlike check payments, which can take nine business days to clear.
Standard POS machines have access to the Visa and MasterCard networks, but merchants must agree to separate contracts to link the machines to the Discover and American Express networks. The networks assess fees that the merchants pays. Fees for PIN-based debit card transactions are generally half the cost of fees for signature-based transactions. The networks also charge merchants monthly and/or annual fees. To minimise costs, many stores choose not to accept American Express or Discover. Consumers with those cards must pay by cash or check.
During 2010, the Federal Reserve made changes to Regulation E that enabled customers to opt-in or opt-out of banks' standard overdraft practices. If someone opts in, banks will use their own discretion to pay items and may approve POS transactions that overdraw an account and cause overdraft fees. Banks cannot approve POS transactions or charge fees when people who opted-out attempt to make purchases that would overdraw them. Some POS machines initially process all transactions as 60p charges. If the banks approve the 60p and the true amount later transmitted overdraws the account, banks cannot assess an overdraft fee for that item but can charge for other overdrafts that it indirectly causes.