Innovations and Payment Systems

Automated tip amounts: how to regain control


Clever mobile payment software in taxis and restaurants could be causing you to spend more on tips than you normally would

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Clever mobile software could be causing you to spend more on tips than you normally would.

Restaurants, taxis and other service providers are using more mobile devices to collect payments from customers — with automated tip amounts suggested for you. The experience goes like this: You swipe your credit card and then, rather than sign a paper receipt, you finger-sign on a touchscreen, or in the case of many taxi systems, don’t sign at all.

The absence of paper takes one step out of the process: the step where you would physically write down how much tip you’d like to add.

Are automated tip payments busting your budget?

That’s created an opportunity for merchants and mobile payment processors to subtly manipulate consumers into suggesting a tip of the merchant’s choosing. When presented with the payment for approval, along with the option to add a tip by tapping on one of three choices. Typically, your choices are 15 percent, 20 percent or 25 percent of the total due. You also have the choice to add a custom amount, or no tip at all. But, experts say, presented with these options, most people will instinctively pick the middle number.

A sense of ‘inherent fairness’
That’s because of what psychologists call the “compromise effect,” according to Art Markman, professor of psychology and marketing at the University of Texas at Austin. “If you’re buying a blender and you don’t know too much about them, you don’t want a cheap one that will fall apart and you don’t need the Rolls Royce of blenders. So you choose one priced in the middle,” he explains. Experiments have confirmed the tendency, he says.

Coffeehouses use the compromise effect to their advantage, adds William Poundstone, author of “Priceless: The Myth of Fair Value (and How to Take Advantage of It).” For instance, he says, Starbucks offers tall, grande and venti coffees, and most people select grande, even though it might be a bit more than they actually want. “That’s 16 ounces — two full cups — of expensive coffee!”

The compromise effect may be especially powerful when it comes to tip suggestions because many people are confused about tipping, and find it socially awkward. “There’s a human being in front of us, and we have a sense of inherent fairness,” says Kit Yarrow, author of “Decoding the New Consumer Mind,” due out in March 2014. “Through these tools, they tell us in effect what the standard should be, and we pay attention to that. We don’t want the person to feel that they haven’t been treated properly.”

Then there’s the fact that calculating a tip percentage without electronic help can be difficult, especially if you’re deep in conversation at a restaurant or about to jump out of cab and hurry to an appointment. “People don’t know how much to tip, and they need to calculate it in their heads, on the fly,” Yarrow says. “So if you present them with a cue, they will seize on it.”

Industry averages
Providers of mobile point-of-sale systems point out that not only are consumers free to enter whatever amount they choose — or no tip at all — merchants are also free to set the suggested amounts at whatever lavish level they wish. Still, most such systems come with a default of three choices, of which the middle one is 20 percent.

Why 20 percent? “Those percentages fall in line with industry averages,” says Taylor Morgan, product manager for Mobile Pay, the mobile point-of-sale solution at consumer transaction tech company NCR. Mobile Pay by default offers customers a choice of 18 percent, 20 percent and 22 percent tips. But, according to Zagat’s restaurant industry survey, the average restaurant tip in the United States is 19 percent — below that magic middle number. Many restaurants are seeking to establish 20 percent as a standard, by, for instance, collecting a tip of that size automatically from parties of six or more.

Of our three buttons, roughly 50 percent of passengers choose the 20 percent tip. A little less than 5 percent choose the 15 percent tip, and about 10 percent choose the 25 percent tip.

— Jason Gross
Verifone vice president of marketing

When it comes to taxis, an industry average tip is considerably harder to pin down, but if there is one, it most likely isn’t 20 percent. “My standard practice was to round up to the next bill I had in my pocket and tell them to keep the change, so the percentage was dependent on how close it fell to that round number,” Markman says — a not uncommon practice. In New York City, which has more taxis than any other city in the United States, tip averages have held at 18 percent for the past several years, according to the Taxi and Limousine Commission.

That number would be lower without tip suggestions. Before the city mandated that all cabs accept credit cards, tips averaged around 10 percent. They shot up once the mobile payment systems appeared and the increase was widely attributed to tip suggestions.

Not surprisingly, most New Yorkers continue to opt for the middle number. “Of our three buttons, roughly 50 percent of passengers choose the 20 percent tip,” reports Jason Gross, vice president of marketing for VeriFone, which supplies mobile point-of-sale systems to many of New York City’s taxis. “A little less than 5 percent choose the 15 percent tip, and about 10 percent choose the 25 percent tip.”

Naturally, higher tips make merchants and their employees happier. But the mobile point-of-sale vendors, who calibrate their devices to encourage higher tipping, have a self-interest as well: As credit card payment processors, they collect a small percentage of every sum charged. Bigger tips mean bigger revenues. “There is competition among credit card readers for mobile devices,” Markman says. Anything that makes merchants feel they’re getting better service or doing better by their employees is likely to improve the vendors’ standing with the merchants. Tip suggestions that lead to bigger tips are “a low-cost way for vendors to be better to the merchants who are their customers,” he explains.

Automatic tipalternatives
But automatically paying a 20 percent tip may or may not fit with your financial goals, or with the level of service you receive with any given cab ride or restaurant meal. So before you tap that center tip amount, consider these alternatives:

1. Tip with cash
Though less convenient than tapping a suggested percentage, cash tips offer a few advantages. You can be reasonably sure the individual you tipped will either get the tip itself, or a fair share of patrons’ pooled tips. What’s more, he or she (or the tip pool) will get 100 percent of the tip, whereas if you use a credit card, the payment processor takes a small percentage.

Just as importantly, tipping with cash will make the transaction more real from your point of view. “Pulling out cash makes you think about the amount of money you’re laying down,” Markman says. To a lesser degree, so does calculating a tip yourself and then writing that number on a paper receipt. But he believes simply clicking a tip percentage takes so little attention that it doesn’t fully register with many consumers. “You press the button and walk out,” Markman says. “If someone asks you what you tipped, you may say, ‘I don’t know. I think I left 15 or 20 percent.’ Of what? ‘I don’t know.’ We’re getting closer and closer to the notion that money is completely abstract.”

2. Always pick a custom amount

Like paying cash, picking a custom amount will prevent you from thoughtlessly following a tip suggestion and force you to decide for yourself what tip you want to give.

Indeed, one of the newest mobile point-of-sale systems, Flint Mobile, allows merchants to accept credit cards using a smartphone camera rather than a swiping device. The company has taken an innovative approach to tipping as well, replacing specific tip suggestions with a sliding scale that customers can use to pick any tip between 0 percent and 50 percent.

“We specifically did that thinking about the psychology of it from the consumer point of view,” says Greg Goldfarb, Flint Mobile’s founder. “As a customer, I get a little turned off when I see preconfigured tip amount choices.”

3. Do your homework
Consumers feel compelled to follow tip suggestions because they don’t know the right amount to tip, Yarrow says. You can overcome that uncertainty with a little research. “I remember finding a guide on what everybody should tip,” she says. “I ripped that out and studied it and it made me feel a lot better.” These days, the general tipping guidelines at the Emily Post Institute is a good place to start.

“Once you know what the appropriate range is, you can feel confident that your tip is adequate and leave with a smile,” Yarrow says. “Knowledge is power.”

4. Pick your own tipping profile
“As a consumer, I should decide what kind of tipper I am across the board,” Markman says. You may still leave a larger tip for particularly good service, or a smaller one for particularly bad service. But if you know before you ever walk into a restaurant or hail a taxi that your standard practice is to tip X percent, you’ll know to either look for that percentage or leave a custom amount when you’re presented with those tipping options.

You may even choose to leave larger than average tips, and that’s fine. Gross, for instance, says he typically tips 25 percent — because he once lived partly on tips himself. “I’m generous because I used to be a waiter,” he says.

See related:Tipping your waiter or waitress? Ditch the credit card, pay with cash

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