The Effect of Card Acceptance on Sales: The Case of Taxicabs in New York

Does taking plastic get people to spend more money? The card networks certainly think so and have often touted increased sales as one of the reasons why merchants should accept plastic and be happy to pay for it. My skeptical economist colleagues question this. They argue that the main effect of accepting cards is to shift sales from merchants that don’t accept cards. But once all the merchants in an industry — say all supermarkets or all liquor stores — take cards, that benefit goes away. And why, they argue, should plastic make people want to spend more money? What miraculous powers could plastic have to make people want to consumer more?

The experience of the New York City taxi industry should make the skeptics reconsider. It appears that taking plastic really does increase sales. And it doesn’t take much to figure out why.

The City of New York forced taxicabs to install meters in the back of taxis a couple of years ago. The drivers were initially recalcitrant, and even went on strike. But the City persisted. Now every taxi has a meter and drivers have relented on letting customers pay this way. In my experience relatively few drivers in New York insist that the machine is broken or look like they will break my legs if I whip out plastic. They don’t even seem that grumpy.

According to a well-researched and fascinating article in the New York Times, accepting plastic seems to have increased taxi receipts by about 13 percent in a down economy. According to one taxi trade group representative, “Credit cards helped the New York industry stay stable in a time when the rest of the for-hire industry was in significant decline.” People are taking short trips and paying with plastic; before they might have walked or taken the subway.

This is great news for consumers, taxi companies, and card issuers. Taxi rides are an enormous cash-paying market in the United States, and it is going plastic. One of the leading companies behind this effort is TaxiPass, which has installed meters in taxicabs in Newark, Las Vegas and many other places around the country. Consumers love to pay this way and taxi drivers are finding with TaxiPass just what the New York Times reports: tips are higher.

So why were the skeptics wrong (or at least seem to be based on this evidence)? Well, they have forgotten the contributions of not one but two economists who received the Nobel Prize for examining the role of “transactions costs” in the economy. Oliver Williamson is one of these , winning the prize this year. Ronald Coase is the other, who was awarded it in 1991. It turns out that there is lots of sand in the economic engine — these are called “transactions costs,” and cover basically all the inconveniences that occur in markets. A lot of institutions and practices develop to grease the engine — to reduce these transactions costs.

Plastic is an important source of grease for the economic engine. Being able to pay with plastic — or with electronic money — makes it easier on buyers and sellers. The taxi industry is a prime example. People like paying with plastic because it saves them a trip to the ATM machine (yes, it is easy to find an ATM machine in New York, but it takes time which many people rushing around Manhattan don’t have). For many people there’s also an advantage to getting a receipt showing the tip that they can give to their employer or the IRS. And for those math-challenged, I suppose it is easier to have the machine calculate the tip. The skeptics tend to minimize or ignore these challenges, but they are quite real for many people. And that, of course , is why modern economies have all embraced cards as a form of payment.

The taxicab story has important business implications for payments. Anything that reduces transactions costs is a worthwhile innovation for both consumers and merchants and increases economic welfare. It also has critical policy implications. Merchants in complaining about interchange fees act as if they don’t get any benefit out of it. They make the rather counterintuitive claim that cash and checks and other centuries old payment devices are cheaper. The New York taxi example shows quite plainly that merchants benefit even when they all take plastic.

Neither merchants nor policymakers should forget the lessons of Coase and Williamson. Transactions costs matter and innovations like cards that make life easier are very valuable.

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