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Taxi drivers get bigger tips when paid by credit card

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Decision Science News was in a cab in Houston some years ago. The driver said that he did not like it when people paid by credit card, claiming that if the card turned out not to be good, it was his loss. DSN never really understood this. Perhaps in Houston they used the old-fashioned schoonk-schoonk credit card readers that don’t approve the card first? One would have thought the drivers would appreciate having less cash on hand, giving people less reason to rob them.

New York City cabs now have credit card readers and touch-screen computers in the back. They present the passenger with preconfigured tip options, which start at 15%. The passenger can enter his or her own tip, but this requires more typing. What does this do to the amount people tip? The data are in. It turns out that the cabbies get bigger tips when cards are used.

Why? Good question. Perhaps when people tip by cash they tend to round against the driver’s favor. Or perhaps the menu of choice options causes people to see the merits of tipping at least 15%. Or perhaps when the least-effort option is to tip 15% or more, people will go down the path of least resistance. Similar, but not totally similar to default effects, a specialty of the house here at Decision Science News.

P.S. DSN likes to use its PayPass. One simply holds his or her keychain (or special credit card) up to a PayPass reader in the back of the cab et voila, payment magically occurs. It is the ultimate in payment decoupling, you literally do not have to touch anything in order to pay. We see a future PhD thesis topic in this somewhere. Would not having to touch anything make you more likely to pay? Would you pay more?



  1. Daniel Reeves says:

    I tip more when paying by credit card to compensate the driver for the cut that the credit card company (and the government) takes out of the transaction.

    March 9, 2010 @ 8:22 pm

  2. dan says:

    Excellent point, Dan. What’s the CC company’s cut?

    When you say “and the government” are you suggesting that drivers might not report cash tips?

    March 10, 2010 @ 2:36 pm

  3. Jean says:

    Upon reading this, I immediately had the same thought Dan did: Of course I tip more when I pay by credit card because I know credit cards are costly to drivers. (Chicago cabs don’t have an tip calculation thingie, so it’s not a default effect in my case.)

    March 10, 2010 @ 4:18 pm

  4. Jean says:

    Clarification: I had the same thought Daniel Reeves had (comment #1).

    March 10, 2010 @ 4:19 pm

  5. Jean says:

    But it is interesting that I never bothered to find out how much the credit card company takes. It’s also possible the cab company charges a markup on top of that for providing the credit card equipment. And I don’t know how easily drivers can get away with not reporting cash fares (thereby avoiding taxes). All this uncertainty never bothered me– I just round up a bit more than usual when I pay by credit card.

    March 10, 2010 @ 4:27 pm

  6. Jean says:

    Here’s a link on the economics of cabbies accepting credit cards:

    March 10, 2010 @ 4:29 pm

  7. Daniel Reeves says:

    Googling around, I see estimates of 1-5% for the credit card companies’ cut.

    I was indeed suggesting that drivers underreport cash tips to the IRS. Maybe their employer too, though most likely they don’t have to share tips with their employer.

    I guess you could view my strategy on its head: I’m not compensating them for having to deal with my credit card, I’m penalizing them for presumed cheating when I tip in cash. Of course my real motivation is just to not feel like a cheap bastard. Since cash is more valuable to them, it takes less of it to achieve that objective.

    March 10, 2010 @ 11:21 pm

  8. john mc says:

    Hi, interesting piece. I posted about something very similar recently but more specifically how the framing of what the tip might be could actually change what I was prepared to give, sometimes in spite of the bad service I received. (http://redirect.ogilvy.com/2010/03/08/theartoftipping/)

    March 21, 2010 @ 3:30 pm

  9. re:direct » Blog Archive » Lessons from the concrete jungle: Yellow cabs and the art of tipping… and some follow-up evidence says:

    […] irrespective of the service they provide. The good people at Decision Science News have recently posted on a similar topic that suggests this may be true. They reference data from the NY Taxi and […]

    March 24, 2010 @ 1:46 pm

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