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'This is big business': How a cashless society is fuelling higher tips and profits

Only 10 per cent of all transactions in Canada are now made in cash.
Mario Trejier displays the tipping options on his POS system at Vancouver's Mario's Coffee Express.

As people continue to purge cash in favour of debit and credit cards, ubiquitous digital payment terminals are increasingly providing opportunities for customers to tip — and tip well — on even the most routine services.

"Because of technology, it's easier to ask for a tip," says Darren Dahl, an Innovate BC professor in the marketing and behavioural science division at the UBC Sauder School of Business.

The sight of digital payment terminals is not new; however, the recent acceleration of tipping options is, says Dahl.

"The touchpad and payment screen monitor systems that exist now, there are different ones — say you go to Earl's, it's a broad tablet, or if you go to Subway, it's just a little keypad — but all of them have enabled this opportunity to tip, right? It's just programmed into the system," says Dahl.

"So, the opportunity to tip has been enhanced in a lot of different verticals, so, everything from fast food to almost any service organization. You could find examples where there's really no service, it's just actually buying a product or something, and there's still an opportunity to tip the cashier, who isn't giving you good service per se like you would receive in a fine dining restaurant," he adds.

Polls show that fewer and fewer customers are carrying cash these days, accelerated by the pandemic.

The Bank of Canada says the volume of cash transactions declined from 54 per cent in 2009 to 33 per cent in 2017, while the value of all transactions went from 23 per cent to 15 per cent, according to the bank's survey in 2019.

This year, a Research Co. poll found just 18 per cent of consumers made a cash transaction in one month, and Payments Canada states only 10 per cent of all transactions in Canada are now made in cash.

The consumer behaviour behind tipping

It is a reality observed by Guilherme Gomes, manager at Sciué, a downtown Vancouver cafe offering both counter service for muffins and a coffee and table service for a casual meal.

Gomes says the payment terminals facilitate tipping.

He says about one in five customers pays cash; however, most tips come from card payments. At mid-morning one day, for example, Gomes counted about $30 in digital tips when his cash tips jar showed only some loose change, totalling under $2.

"They see the option, and I think they kind of feel bad about not tipping," says Gomes.

Also, when customers pay with cash, the change they receive may not be sufficient or precise enough to leave an adequate tip, says Gomes.

Doors away from Sciué is Mario's Coffee Express, owned and operated by Mario Trejier.

Trejier says he's not interested in tips and pays his staff well above minimum wage. However, he still employs a digital terminal that prompts the familiar question, "Add tip?"

If you select "Yes," you can choose 10%, 15% or 20%.

Trejier says the tips he receives are nominal and help offset the monthly fees he's charged for using the terminal.

"I don't expect it, and people shouldn't be pressured. It's welcomed, but it doesn't make a difference in how I serve coffee," says Trejier, whose sidewalk sandwich board happens to indicate he pours "the best coffee in town."

Gomes and Trejier oversee establishments known to Statistics Canada as limited-service eating places, which make up about 40 per cent of all food service and drinking places.

Industry experts say tips are on the rise due to many factors, but at the end of the day, the payment terminals are largely behind them.

Consumer behaviour plays a crucial role in tipping via these payment terminals, says Tim Silk, associate professor of teaching, marketing and behavioural science division at the Sauder School of Business.

Silk's research shows people are less price sensitive when paying with debit cards than with cash.

"When you feel the act of actually paying with cash, you're seeing the money leave your pocket and leave your hand," says Silk. "And there is this psychological pain of paying that may or may not be salient to the individual when you're paying with a credit card or debit card. I mean, it's just a beep, and you don't see the money."

But in some instances, the terminal could present an emotional barrier between the customer and service provider, says Silk.

"It could also work against giving a tip because it feels transactional and non-relational," he says.

The terminals also facilitate larger tips by allowing restaurants to set the percentages. Anecdotal information shows the percentages growing in recent years.

Dahl says tip requests of as much as 40% raise customers' eyebrows.

"That's not normal. And, you know, most people see today 15, 18, 20, you know, it's that normal range. You've seen it bump up over the last couple of years to 18, 20, 25 in some locations," notes Dahl.

Silk says people will usually choose the middle option so as not to appear cheap but also because humans are subject to extreme aversion bias.

David Tikkanen, head of the tourism marketing program at BCIT, says research suggests being asked to tip on these terminals is unlikely to sway a non-tipper but is likely to encourage a tipper to tip more.

Who benefits from higher tips?

Prompting all these tips are restaurants and stores that are sold these digital terminals by large financial technology companies that complement the services of major credit card companies.

Restaurant and cafe operators Glacier Media spoke to say the tip option is prompted upon setup, and they can choose the percentage options.

The largest payment terminal provider is Moneris, which supplies about a third of all terminals. Moneris told Glacier Media that users do not need to choose a tip option upon setup.

Either way, industry experts such as Dahl acknowledge various interests may stack up against the customer to implore tipping more. 

"There's no question Moneris benefits as well from higher tipping behaviours," says Dahl. "In many ways, it's weighted slightly against the consumer because of the self-interest factor of each party: Visa, the tech company and the restaurant. And pennies on the dollar on this issue is huge when you think about the number of service transactions and tips that are realized daily in the country.

"This is big business," says Dahl.

Tipping on taxes and surcharges

It's unclear exactly how much British Columbians tip in one year, but some assumptions can be made to draw an estimate.

According to Statistics Canada, B.C.'s full-service restaurants, caterers, cafes, coffee shops, and drinking places are on pace to bill British Columbians a record $14 billion this year. Half of those receipts ($7.2 billion) will come from full-service restaurants, while $437 million will be from drinking establishments.

Assuming alcohol sales accounted for the industry goal of 30 per cent of full-service restaurant bills, there would be about $2.6 billion in alcohol sales, which are taxed at 15 per cent. The $14 billion worth of bills would have about $960 million in tax added to the subtotal.  

So, if British Columbians tipped 15 per cent, on average, across all establishments, it would amount to about $2.3 billion in tips. And by using cards roughly 80 per cent of the time, it means $1.8 billion in tips is being processed digitally.

If the terminal providers charge their stated 0.4 per cent on the total bill, they earn $7.2 million from tips on B.C. food services alone. According to Payments Canada, credit cards take an even greater cut — about 1.5% — and represent about 49 per cent of in-store transactions in 2021.

Across Canada, Canadians are poised to spend an estimated $80.5 billion on all food service — of which an estimated $64.4 billion will be paid by a debit or credit card. It's unclear just how much more the terminals are causing Canadians to tip, but an extra $644 million goes to workers for every additional percentage point. And of that, the terminal providers will see $2.8 million.

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