Are we sleepwalking towards a cashless future? - Lessons from Sweden
Walking through the bustling, picturesque streets of Stockholm, it is common to see a particular sign in shop windows; ‘No Cash’ or ‘Card Only’ plaques appear almost everywhere. Homeless people selling the ‘Situation Stockholm’ magazine accept payment by card or mobile app, and even donating to the church collection is now frequently digital.
According to Sweden’s Riksbank, just 13 per cent of people said they paid for their most recent transaction with cash. That compares to around 40 per cent eight years ago1. More than any other country, Sweden has been on a rapid journey towards becoming a cashless society
Why then has Sweden moved from ‘peak cash’ in December 2007 to a situation where leading academics expect it to be the world’s first cashless society by March 2023?
We spoke to Niklas Arvidsson, Associate Professor at the Royal Institute of Technology (KTH) in Stockholm and author of “Building a Cashless Society: The Swedish Route to the Future of Cash Payments” about why the country has gone through this rapid change, what the societal impacts are and what other countries can learn from Sweden’s experience.
Sweden’s journey towards a cashless society
‘Perfect storm’ of factors created conditions for the dash to cashless
According to Professor Arvidsson, neither the Government nor the Central Bank set out to drive this transition. Rather, a range of influencing factors, some broader international trends, and some unique to Sweden, came together and created the ‘perfect storm’: “It is a complex transformation where laws, politics, business interests, technologies, values, habits and power games play important roles”2.
Among the most influential change agents, according to Arvidsson, are Swedes themselves. He describes the nation as “characteristically curious and comfortable with technology”3. When you consider that tech-driven champions from Ericsson to Spotify, Klarna to Skype have emerged from this nation of fewer than 10 million people, it illustrates the point.
Importantly, trust and familiarity with technology among the Swedish population stretches back to the baby-boomers. In the years after WW2 in which Sweden flourished economically, the country embraced technology, not just in their households but in regard to their finances as well. During the 1960s companies started to pay employees via new ‘transaction bank accounts’ following major investment and marketing campaigns.
Another big step change in technology came during the 1980s and ‘90s when card companies made major investments in terminals and banks intensified their efforts to shift towards digital payments. Banks saw cost benefits of running efficient, electronic systems and started to charge for payments via cheque. The number of card payment terminals shot up from around 25,000 in 1993 to 70,000 in 1996 and over the next decade the use of cards grew steadily4.
Post 2010 there was another wave of tech innovation. Mobile payment service, Swish, launched in 2012 as a collaboration between six large banks. It initially enabled real-time peer-to-peer transactions by connecting an individual’s bank account with their mobile phone number. A person could send a friend money and it would almost instantly be cleared, settled and the transaction shown to both parties through a smartphone app. The system really came to prominence though around 2015 when small vendors, market sellers and then merchants started to embrace the technology.
Swedish fintech iZettle continued the digital payment trend. It launched its mobile card reader in 2012 and then improved in iterations released in 2015 and 2016 when it became Bluetooth enabled. The technology, provided free to merchants, allows consumers to pay with card (either contactless or using a PIN) in almost any location and is compatible with all the major card companies. Companies like iZettle have broadened the use of electronic payments for smaller merchants, who would otherwise have been cash only.
An unlikely source of pressure
With a willing population and new technology enabling change, another major actor on the path to cashless came from an unlikely source – workers’ unions. Following a spate of high-profile cash robberies, unions started to question why workers were put at risk handling, transporting and securing cash when digital payments offered a far safer alternative. Powerful unions representing public transport workers, banks and merchants all actively lobbied against the use of cash and Professor Arvidsson suggests this “had a big impact on popular opinion, on consumers as well as on government and business.5”
Safety concerns were also a big factor influencing the attitude and actions of retailers. On the back of the unions’ campaigning many shopkeepers, and particularly those in metropolitan areas like Stockholm, felt that they didn’t want to take the security risks of holding cash.
The role of law
The very fact that merchants could refuse to accept cash is an important consideration, according to Professor Arvidsson. Legal requirements of retailers to accept cash payments varies across Europe but in Sweden it is not obligatory. If a shopkeeper doesn’t want to accept notes and coins, they can point-blank refuse them. Professor Arvidsson said “If the Swedish government had said merchants must accept cash, as other governments do, the transition, or at least the speed of the transition, would not have been possible6”.
Professor Arvidsson argues that the introduction of new tax laws aimed to drive greater transparency and grow government income were also an important factor. New rules, which came into effect in 2007, incentivised individuals by giving them tax reductions on formal payments that would previously have been made through the ‘grey economy’.
Coupled with this, Sweden also brought in further new rules to reduce tax evasion by merchants. Strict controls were imposed on cash registers so they could not be manipulated and so that the authorities could access full information on sales upon request. As a result, this made merchants gradually reduce the acceptance of cash.
Unintended consequences
In 2008 Sweden’s Riksbank decided to renew its currency, to replace ageing notes and coins with a new design using modern materials. It was not intended to have an impact on cash usage, but when the policy came into effect from 2015, that is exactly what happened. Firstly, a large amount of Krona that was in circulation was not swapped for the new currency. By July 2017 the Riksbank reported that almost $1 billion USD of the old currency was not returned. This reduced the amount of cash in circulation – particularly in higher denomination currency. Professor Arvidsson also believes that this led people to actively consider whether they wanted to keep using cash or not. He states: “when the position was taken in 2008, they (the Riksbank) didn’t have these developments in mind but arguably, the exchange of bills and coins was the time when the ‘tipping point’ became evident7”.
A privatised cash system
A confluence of factors clearly led to less demand for cash in Sweden, one other factor also influenced the ability of Swedes to get their hands on it. The system for cash handling services was outsourced to private enterprise in 2004. As Professor Arvidsson explains: “this means that important activities such as printing, transportation, protection, equipment supply and other services are provided by private companies like banks. This led to a supply and demand-driven development of the use of cash8”. For this reason, around half of Sweden’s 1,400 banks no longer accept cash deposits9. Furthermore, unlike in other countries, the Swedish Central Bank “doesn’t govern how much cash is in circulation, that is effectively decided by demand from the users of cash10”.
The societal impact of a transition to digital payments
Professor Arvidsson identifies a range of existing and potential future benefits for Swedish society resulting from the move away from cash.
Lower costs, higher spending
Card and app-based payments cost merchants less to process. In theory that means retailers can invest more elsewhere, in customer experience or in price. Beyond merchants, the cost to society at large is also less. Academic research conducted in Sweden in 2012 quantified the potential savings, estimating the total cost of a debit card payment at 5.5 Krona (around 52 Euro cents) versus the total cost of a cash payment at 8.3 Krona (around 78 Euro cents).11,12.
Professor Arvidsson points out that the move to digital payments is also likely to be a positive stimulus for the Swedish economy because studies show people spend more when they use a card or app versus cash. “The psychology of transacting is such that people are less conservative when they are not handing over cash. They will pay a little bit more, buy a few more things and so for the Swedish economy as a whole, this should be a good thing13”.
New industrial champions
The advent of digital payments has also seen the birth of a new and flourishing industrial sector in Sweden. Klarna is Europe’s biggest fintech success with a valuation in August 2019 of USD $5.5 billion while iZettle’s success led to it being acquired by PayPal for $2.2 billion in 2018. A wave of smaller fintechs are also emerging and Stockholm has become a hotbed of innovation. As Professor Arvidsson says: “New entrants including a raft of fintechs can now offer solutions which increase competition and bring consumers what they want. It’s a big step forward for Sweden where the industrial champions formed in the 1800s have dominated the economy for a long time14”.
The other clear benefit from the move to cashless is a reduction in robberies. In 2017 only 11 bank robberies were reported to police, a 90% reduction versus 2009 according to The Swedish National Council for Crime Prevention, while robberies of armoured vehicles is also on the decline15.
Vulnerable sections of society at risk
While the majority of people in Sweden are comfortable making digital payments, some have been staunch in their defence of cash.
The County Administrative Board in Sweden has identified several groups as being at risk of being excluded from the financial system and even Swedish society if cash disappears. Interestingly these groups exist, not just in rural areas of the country but in all 24 counties.
“Most at risk are elderly and people with physical and/or cognitive disabilities” explains Professor Arvidsson. People who are unable or not willing to use smart phone technology or regularly recall a PIN number for a card payment are finding it harder and harder to participate in economic activity. Immigrants who do not have access to banking services are also identified as a vulnerable cohort. With over two-thirds of the Swedish population using the Swish system (which requires a mobile phone and a bank account to transact), those on the edges of mainstream society could be locked out if cash totally disappears.
A vocal opposition
High-profile pressure groups have emerged in Sweden to represent and campaign for the interests of those in society who are negatively impacted by the decline of cash. The National Organisation of Pensioners (PRO) has been vocal in calling for measures to protect cash.
The impact of the PRO and other pressure groups has led the Swedish Parliament to launch an investigation into the role of retail banks in Sweden. Specifically, it is looking at whether they should be required to provide more ubiquitous cash services. Professor Arvidsson believes “it is likely that prescriptive legislation will pass; that means banks will need to provide consumers with better access14”. If the rules come into effect in 2021 as planned, Swedish consumers should not be more than 25km from an ATM or from a cash deposit base.
Lessons & Insights
So what can other markets learn from the dash to cashless in Sweden?
1. Prepare for change
Other countries should not underestimate the pace of a potential move away from cash and, as such, should prepare early by identifying the potential issues and recognising the vulnerable groups in society who would need support. In Sweden, this process happened too late. While commendable efforts are now going into educating these groups about digital payments and protecting their access to cash, Sweden has passed the tipping point and it is behind where it should be.
“Germany, France and other EU countries shouldn’t rest on their laurels and think it won’t happen. Sweden wasn’t naïve, it wasn’t stupid. Things just moved very quickly, many factors came together at the same time and the country was not prepared for the pace of change19”.
Professor Arvidsson cites the UK’s Access to Cash Review as a good example of preparation being done at the right time (the UK still currently sees around 30% of transactions in cash versus 15% in Sweden20).
2. Define responsibility
Arvidsson advocates for clear and defined responsibilities for all actors in addressing the issues created by a move away from cash. In Sweden, the legal system allows for ambiguity because the Central Bank only has an obligation to provide access to cash when the market does not.
“The responsibility on banks to provide access to cash has been unclear so far in Sweden. The Central Bank has stepped back, and merchants have been able to say no to cash transactions. No one has really had a clear responsibility to provide cash or to provide access to payment services”.
While the current legislative moves by the Swedish Parliament could well ask banks to retain some cash services, according to Arvidsson, this clarity “should have come much sooner21”.
3. Stimulate innovation
To address some of the potentially negative impacts that the decline of cash can bring, Professor Arvidsson urges governments to think about how they can “protect people through innovation”. How can they stimulate innovation in the private sector with both big business and start-ups to help to solve the issues created for those in society who are marginalised by the move to cashless?
“Technology and payments companies need to innovate more for those who are less comfortable leaving cash behind. Payments products for the partially sighted for example are being developed, and so too are bank accounts linking parents and children, but more could be done. It doesn’t necessarily have to be high-tech but thinking about what these people want and need. Pre-paid, contactless cards are a great example of fairly straight-forward technology which can be adapted to suit the unbanked22”.
4. Educate
A final lesson from Sweden’s experience is the need for better education on digital payments and more broadly on financial planning in the digital age. He highlights that the move to digital payments is a seismic shift analogous to the adoption of fiat currencies, and therefore suggests countries on the path to less cash need to help all their citizens through that change.
“In Sweden, savings banks did a great job in the post-WW1 era of educating people about financial planning. Similar campaigns need to be considered today to educate about similar issues in the digital age. Not only how can you pay and what technology is available, but also how can you budget, how can you be responsible when you don’t have notes and coins?23”.
Reflections
Niklas Arvidsson’s insights from Sweden show that planning for a future in which cash is in decline needs to take place early, because the pace of change can be exceptionally quick. The Swedish experience also shows us that there is no set path for this journey and no set of indicators. Every country is different with unique history and values and these need to be considered – so too do unintended consequences, like the Swedish Unions’ efforts to protect employees from violent crime and the Government’s attempts to reduce tax evasion.
Technological, demographic and economic meta-trends indicate that we are all likely to move towards lower cash, if not cashless economies. This can bring many and great advantages, however, it is critical that the right planning and preparation is done to ensure everyone in society is considered as this takes place. Ultimately, change is carried forward by no single party, but rather the interaction of an eco-system and the task of preparing for that rests with everyone within it: Government, payment providers, technology companies, consumers and advocacy groups.
1 Riksbank study 2018: https://www.riksbank.se/globalassets/media/statistik/betalningsstatistik/2018/payments-patterns-in-sweden-2018.pdf
2 Interview with Professor Niklas Arvidsson, August 2019
3 Interview with Professor Niklas Arvidsson, August 2019
4 https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/2003/nyberg-overraskande-liten-anvandning-av-kontokort-i-sverige-jamfort-med-vara-grannlander/
5 Interview with Professor Niklas Arvidsson, August 2019
6 Interview with Professor Niklas Arvidsson, August 2019
7 Interview with Professor Niklas Arvidsson, August 2019
8 Interview with Professor Niklas Arvidsson, August 2019
9 https://www.thetimes.co.uk/article/sweden-nation-that-pioneered-living-without-cash-warns-hoard-your-banknotes-6f72jqbf3
10 Interview with Professor Niklas Arvidsson, August 2019
11 Segendorf, B & Jansson, T (2012) The Cost of Consumer Payments in Sweden (Sveriges Riksbank Working Paper Series, no. 262)
12 These costs, which are likely to be lower today, include private and social costs (which therefore incorporates all costs borne by public, merchants, banks, sub-suppliers and the central bank and so should not be compared simply with card payment fees).
13 Interview with Professor Niklas Arvidsson, August 2019
14 Interview with Professor Niklas Arvidsson, August 2019
15 https://www.bra.se/bra-in-english/home/crime-and-statistics/robbery.html
16 Interview with Professor Niklas Arvidsson, August 2019
17 https://www.getswish.se/press-en/statistics/
18 Interview with Professor Niklas Arvidsson, August 2019
19 Interview with Professor Niklas Arvidsson, August 2019
20 https://www.ukfinance.org.uk/sites/default/files/uploads/pdf/UK-Finance-UK-Payment-Markets-Report-2019-SUMMARY.pdf
21 Interview with Professor Niklas Arvidsson, August 2019
22 Interview with Professor Niklas Arvidsson, August 2019
23 Interview with Professor Niklas Arvidsson, August 2019
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