Credit Card Machines Nudge Passengers to Leave Larger Tips

In the November 8, 2009 New York Times article "New York’s Cabbies Like Credit Cards? Go Figure," Michael M. Grynbaum provides an example of behavioral economics in which the credit card machines in taxis nudge passengers to leave a larger tip.

New York’s cabbies howled when the city began forcing them to take credit cards. Some even went on strike, calling the requirements a kowtow to tourists and a burden on drivers.

But two years later, the back-of-the-cab swipe has emerged as an unlikely savior for New York’s taxi industry, even as other cities’ fleets struggle to find fares in a deep recession.

Overall ridership and revenue have increased. More and more fares are being paid with credit cards, even for shorter rides. And tips for drivers, usually an early casualty of tough times, are up sharply, double over the pre-plastic days.

Even cabbies are conceding that credit cards are good for business. “It’s better,” said Naveed Shah, 35, a driver for five years, as he gassed up his Ford Crown Victoria recently. “If there was no credit card, people aren’t going to take taxicabs.”

Other major cities are now rushing to follow suit. Although New York was late to bring credit cards to cabs, it leapfrogged ahead by pioneering a customer-friendly system that required no signed receipts, no minimum payment and an interactive device that let passengers swipe the card and add tips themselves.

In Los Angeles, for instance, credit card machines are often in the front seat, forcing riders to hand their cards to the driver. Business this year is off about 15 percent, according to fleet owners, mirroring national trends in the industry.

In New York, however, revenues have risen about 13 percent from the end of last year, according to data collected by the city’s Taxi and Limousine Commission. And tips, which hovered around 10 percent when cab rides were cash only, averaged 22 percent on credit-card transactions this fall.

“Credit cards helped the New York industry stay stable in a time when the rest of the for-hire industry was in significant decline,” said Alfred LaGasse, chief executive officer of the Taxicab, Limousine and Paratransit Association, a national trade group.

Taxi fleets in Boston, Chicago, Las Vegas and the suburbs of Washington are all beginning to experiment with back-seat card readers similar to those in New York, Mr. LaGasse said.

Once considered a convenient payment method for longer trips, often to the area’s airports, credit cards are now being used for shorter, cheaper rides, the type of $5 rainy-day indulgences that were once handled exclusively with cash.

Amos Tamam, president of VeriFone Transportation Systems, whose card readers are in 6,700 cabs, or about half of the city’s fleet, said his company’s average credit-card fare is now less than $15, down from $16 a year ago.

“The more usage you get with credit cards, the lower the average ticket is going to go,” Mr. Tamam said.

Passengers said that paying with credit cards has become second nature. “Any time I take a cab, I pay with a card, on the advice of my accountant,” said Michelin Hall of Manhattan, after swiping his American Express card in a taxi outside Pennsylvania Station the other day. Mr. Hall said that with cards, “it’s easy to track the receipts, it can tell you how long the cab ride was and where you went” — convenient information when he files expenses for his job in marketing.

The increase in tips, however, may have less to do with New Yorkers’ generosity than with the preset amounts suggested to passengers on the taxi’s software systems. In many of the city’s cabs, riders are offered options for their tip depending on the length of the ride. For fares under $15, a screen prompts tips of $2, $3 or $4; the numbers can range from 15 percent to 30 percent for higher fares. The presets are used about 70 percent of the time, according to industry estimates.

New York’s success seemed unlikely a year ago, when the last of the city’s 13,000 cabs were outfitted with credit-card readers, part of an initiative started in 2007 by Mayor Michael R. Bloomberg. The city was reeling from a maelstrom on Wall Street that disproportionately affected the high-income industries that drive the New York economy.

And riders were still reporting unpleasant run-ins with drivers who refused to accept the cards or pressured customers to pay with cash, a resentment left over from a two-day strike in September 2007 that forced officials to institute an ad-hoc system for shared rides.

But in 2008, taxi officials began noticing a trend: Cab business was staying steady, and credit card use was on the rise.

At the end of last year, about one-fifth of cab rides were being paid for with a card. That portion has grown steadily this year, reaching 28 percent in September, the latest month for which data was available. Meanwhile, black-car business has fallen about 30 percent, as companies encourage employees to use corporate credit cards to expense cheaper yellow-cab rides.

“It’s becoming a way of life in the taxi world,” said Matthew W. Daus, New York’s taxi commissioner. “New Yorkers are getting more accustomed to going around without cash. We think it’s a good thing.”

In interviews, drivers acknowledged that business had improved, but still groused about the credit card machines. The higher tips are tempered by a 5 percent service fee applied to fares that are paid with plastic. Drivers must also wait anywhere from a day to a week to retrieve their fare money paid by credit cards, and they said the machines occasionally break down, resulting in lost fares.

“Because of credit cards we get customers, that’s true,” said Muhammed Hamid, 35, of Queens. “But if they give us cash, you can put the gas on that; you don’t have to wait three, four days.”

Told of the statistics that showed higher tips, some drivers scoffed. “I know that’s not true,” said William Lindauer, a driver and coordinating member of the New York Taxi Workers Alliance. “They get no tips, or less tips.”

A random survey suggested otherwise. Several drivers were asked to share their credit receipts after their shifts. Of 20 receipts reviewed, the average tip came out to just over 18 percent. The preset tip amounts were used more than half the time, resulting in a $5.30 ride getting a tip of $2, or about 38 percent.

It may be difficult, however, for other cities to recreate New York’s success. “Not all agencies in other cities have the same tools, manpower and budget to do what New York City did,” said Mr. Tamam of VeriFone. And New York’s fleet, the largest in the country, has a bigger customer base that can help justify the high cost of installing more advanced credit card technology.

Some drivers suggested, paradoxically, that the recession itself may be prompting greater credit card use. Simon Palade, a driver for more than 40 years, said he sees far more cash fares around the first of the month, when paychecks are often issued.

“After that it slows down and they’ve got to use plastic more and more,” Mr. Palade, 59, of Sunnyside, Queens, said the other day, as he navigated a Central Park transverse. “People don’t got no money. They’re banking on the future.”