NEW YORK (TheStreet) - Are consumers willing to pay and tip their restaurant servers via their smartphone? Maybe, maybe not. Though, a host of mobile payments apps are betting eventually they will and feverishly working to get restaurants to sign on.
While consumer acceptance of paying for restaurant service via their smartphone has remained at grass roots levels, Starbucks' (SBUX) - Get Report strategic focus on building out a mobile payments platform for customers - and with its newest Apple (AAPL) - Get Report iPhone app feature that allows customers to digitally tip their baristas -- could be the impetus this growing niche needs to move their apps into the mainstream. Mobile payments represent 14% of all in-store transactions at U.S. Starbucks, the company said at its investor day this month.
Mobile apps payments including names like TabbedOut , MyCheck, Coverand Dash, are all seeking to revolutionize the way in which consumers pay their tabs in the service industry, where tipping is common. And it's not just startups, OpenTable (OPEN) launched a pilot restaurant payment app with 13 restaurants in San Francisco it said last month.
"Even if we're not at the forefront of that now, [the Starbucks app] is still creating that awareness and soon enough creating the behaviors of consumers not only at Starbucks, but at the bars and restaurants," said Dash co-founder Gennady Spirin in a phone interview.
But getting consumers to adopt the technology is a "steep, uphill climb in developed markets because the current payment systems work quite well," according to a December report by Forrester Research. "Digital wallet providers know this, so they are hard at work to incorporate features that deliver greater convenience and a more compelling commerce experience - before, during, and after the moment of payment. As the barriers to using digital wallets continue to fall (especially when it comes to mobile digital wallets) and the prevalence of highly valued benefits continues to rise, consumer adoption will rise, as well."
Mobile payments in general, for instance Google (GOOG) - Get Report Wallet, have yet to really take off because they really haven't made the process any easier, says Cover's co-founder Mark Egerman. "Having that on your phone, opening your phone by unlocking it - it's not better for the consumer than swiping the credit card. While the rest of the world moving toward mobile payments, the U.S. is not. One reason [is that] consumers don't get any value for it," Egerman said via the phone. In his prior life, he worked for the Consumer Financial Protection Bureau.
Cover also works with full-service restaurants, but instead of hooking up to already established point-of-sale (POS) systems, has created its own payments network for restaurants to sign on to. The company launched to the public in October 2013, having undergone a 13-month private beta testing prior to launch. The app currently has about 75 establishments that it works with in New York.
Egerman says a "few thousand people" are registered with the app and with any given month a few hundred are using it, and likely several times a month. "For average users who use the app regularly, we see people using its two to three times a month," he says.
"It is a behavior change - we strive to make it extremely seamless. The first time is a little different. We've been paying the same way in restaurants," Egerman said, noting the biggest request Cover has had from users is to be available in more restaurants. The company plans to launch in San Francisco in the near future.
The app is processing more than $150,000 a month (March hasn't closed out yet but he expects processing totals to be closer to $200,000 if not over), but Egerman also noted the larger average tip through Cover is about 21.7%. He acknowledges that may be because the app is targeting higher end restaurants, but also notes that "customers appreciate more than anything else convenience. Starbucks understands this," Egerman stated. "Customers don't want an app for the sake of having an app."
Cover users don't have to think about their bill and a primary differentiator from other dining payment apps. When they register for the app, they set their default payment card and tip percentage, which can be changed at any time. Users tell their servers they'd like to use the Cover app and then when the meal is finished, they can get up and go - without having to wait and pay for the bill.
"We are trying improve upon the fine dining experience," Egerman said in a follow-up call. "We are not trying to replace waiters or turn them into robots. We want to complement that and we believe that your phone should stay" in your purse or pocket.
It is this strategy of users not having to take out their phones at all that, according to Egerman, makes Cover's approach to restaurant mobile payments superior.
Through Dash's app users can check-in, view, split and pay their tab from their smartphone at restaurants, bars and clubs. Dash integrates directly with a bar or restaurant's point-of-sale system on the back end.
Spirin and co-founder and CEO Jeff McGregor started the Brooklyn-based company in 2011, but only launched their iPhone app this past November. In contrast, Dash announced it launched an app for Android phones earlier this week.
While only 55 establishments have so far signed on to use the "Pay With Dash" app, with just 15 of those at present active, including Manhattan's Agave, City Crab and Barramundi, the company wants to overhaul "the traditional restaurant payment process to streamline a solution that allowed groups of friends to pay for restaurant bills and bar tabs seamlessly via their smartphones" and is targeting 21- to 35-year-old consumers.
"For them it's really important to hit the trendy downtown, Lower East Side [restaurants] and higher volume sports bars," McGregor says. "As long as we're capturing the right places, it's more important than just the density like 100-200 places on board."
Dash announced last week that it received $1.2 million in additional seed funding, bringing its total seed fundraise to $1.9 million. The investment will help fuel growth in two markets - Manhattan where the company presently is, and in Chicago, where it's planning to launch later this year.
However what the founders did share was interesting. Dash users, on average, tipped higher -- at 24% of the bill than the standard 18% or even 20%.
Why is that? Because they had a better experience at the establishment, which relates to how easy it was to pay, McGregor noted. "What we're seeing is that people are spending more and tipping more" with the app, McGregor said. "The dance at the end of the meal [waiting for the bill and then figuring out the tip and who owes what] ... if it's easier for the consumer to check out, they overall have a better experience and we make it really easy."
But this also speaks to the future of the burgeoning niche. Is there room for all? Dash's McGregor says yes, however, Egerman says no.
"Payment networks are winner-take-all markets," Egerman stated. "Once customers are used to paying a certain way they're not going to have 10 different apps on their phone. In order for this product to succeed you need to be near ubiquity otherwise consumers just won't bother."
--Written by Laurie Kulikowski in New York.
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