A POS terminal is the card machine on a shop counter that reads your card and sends the payment request for approval. It is also called a card machine, a card swipe machine or a PoS machine. POS stands for point of sale, the place where a shop takes a payment.
A POS terminal can read a card in three ways. You can tap a contactless card on it. You can insert a card with a chip. Or the staff can swipe the card's magnetic stripe, which is an older and less safe method. In India, a tap usually needs no PIN for payments up to ₹5,000. Above that amount, you enter your PIN on the terminal.
Take, for example, a customer at a pharmacy in Chandigarh who taps a credit card to pay ₹640 for medicines. The terminal reads the card's details from the chip. It encrypts them, which means it scrambles them so that only the processor can read them. It adds the amount, ₹640, and the pharmacy's ID. Then it sends the request over a payment switching network to the pharmacy's acquiring bank. About two seconds later, the answer comes back, and the terminal shows "approved" or "declined".
The keys used for encryption are stored in a secure element. This is a small chip inside the terminal that is built to resist tampering. If someone opens the terminal, the chip deletes the keys.
Many newer terminals are Android devices with a touch screen. They can also run the shop's billing app, the POS software, and show a UPI QR code. And the terminal itself is becoming unnecessary. An ordinary phone can now accept a tapped card. A printed UPI QR code accepts payments with no hardware at all.