Cashing out

In many countries, physical money is on the decline. Are we heading towards a cash-free future?

by Niklas Arvidsson

Cash transactions in the UK decreased by over 50% between 2008 and 2018, but Sweden is seen as the champion of cashlessness. Its experience provides important lessons to other nations regarding the challenge of, on the one hand, stimulating innovation and new solutions, and on the other hand making sure to avoid a digital divide where some people and businesses are left behind.

For Sweden, the change was gradual at first but then accelerated in pace; so much so that in October 2019 the value of cash in circulation had dropped by more than 40% since its December 2007 peak, to around SEK57.5bn (approximately £4.6bn). Cash is no longer king in Sweden.

The use of cash in the country reached its zenith in December 2007, when cash in circulation excluding banks’ own holdings amounted to almost SEK100bn (about £7.8bn). Having received their wages, people were planning which Christmas presents to buy; in practice, this meant going to an ATM and filling their wallets with cash. However, since then, payment habits have changed. This was gradual at first, but then accelerated in pace.

Why did this happen? The simple answer is that Sweden is simply ahead of the curve, with the rest of the world soon to follow suit. But the full picture is more complicated. There are a multitude of factors driving this transformation in payments.

Sweden leads the way

In the early 2000s, Sweden’s central bank, the Riksbank, decided to outsource important parts of the cash-handling process — such as printing, storing and transportation of cash — to private companies. This marketisation of cash handling meant that profitability (or rather the lack of it) became an important driver of change. Cash-related services did not generate profit for banks and there was no legal requirement for banks to provide such services; this had already affected the use of cash in the first half of the 2000s. In addition, merchants and banks were under no legal obligation to provide or accept cash.

There were also a number of factors that made organisations and the public start to view cash as a problem, rather than as an efficient payment service. During the mid-2000s, banks, stores and even public transport were hit by a wave of robberies. Unions started lobbying for a reduction in the use of cash, to protect their members. In 2008, the public transportation company in Stockholm, SL, became the first such company to stop accepting cash. Prior to this, the government had also clamped down on tax evasion related to household services generally paid for in cash, such as carpentry and cleaning. Invoices and electronic payments became more widely used, further eroding the demand for physical cash.

Technology company iZettle launched its mobile card reader in 2011. This meant that card payments could be used in situations where cash had previously been the preferred, if not the only, solution. All of a sudden, street vendors, kiosks and small restaurants could use a mobile solution instead of cash. But the real game-changer arrived in late 2012, when six of Sweden’s largest banks launched Swish, a new mobile payment service. It has become the dominant service for person-to-person payments; as at late 2019, over 70% of Sweden’s population of 10 million were using the service.

For some, physical cash still has a symbolic importance that elevates it above online payments

Facing a new reality

Today, more than 50% of bank retail branches do not provide cash-handling services, and access to ATMs and cash deposit machines has not increased to compensate for this. Around 20% of merchants selling discretionary goods are not accepting cash at all. This dethroning of cash has brought many positives, including more cost-efficient payments, lower risk of robbery, greater competition and the proliferation of innovative start-ups. But it has also created problems. County administrative boards — government agencies in each of Sweden’s counties — are monitoring access to basic payment services and have seen growing problems for the more vulnerable members of society, especially the elderly, people with disabilities, immigrants and smaller businesses in rural areas. Those who find it harder to navigate online systems — either because of lack of access or tech literacy reasons — are in danger of losing out.

In response, there have been public protests. Following a parliamentary inquiry, the Swedish government will now require banks to provide cash-related services in all parts of the country, and the central bank to provide new cash depots in the sparse and little populated north of Sweden. Despite criticism from banks, these policy changes will be implemented this year, with the aim of guaranteeing that everyone in the country has access to basic payment services.

The role of digital currencies

The question of how we pay for things is not just technical; it is emotional. For some, physical cash still has a symbolic importance that elevates it above online payments. In 2013, along with two consulting companies and a public transportation company, I conducted a study in which we asked 1,000 Swedes about their views on cash. Some two-thirds of respondents said that they saw physical money as a human right, demonstrating the prominent position cash still has in society. And it still plays a critical role in the payment system. Fiat money (currencies backed by the government) essentially represents a contract saying that the holder of a specific bill — let’s say a SEK500 note, equivalent to about £40 — has a claim on the state. This is what we call central bank money. Given the historical stability of the Swedish state and its economy, this is a strong claim that reassures the owner their money is secure. But if cash disappears, the public will no longer have access to this type of claim.

The money in your bank account is a claim on the bank providing the account, and this is what we call bank money. In most countries, these deposits are guaranteed by the government up to a certain sum, which is why banks argue that we do not need central bank money. Their view is that bank money is just as reliable. I disagree. The Riksbank was granted a monopoly on providing cash in Sweden in 1904, as the cash markets at the time were chaotic. Banks supplied their own cash and, given different banks’ differing economic situations, the value of the varying kinds of cash fluctuated. A crown from bank A could lose its value in relation to a crown from bank B. Granting the Riksbank a monopoly on cash created order and stability. I believe that central bank money should always be available to the public.

This raises the question of what form this money might take. We are used to bills and coins, but could it also be provided in an electronic form? Like other central banks worldwide, including those in Canada, China and Uruguay, the Riksbank is exploring this option. Called central bank digital currencies, these could become a form of cash that is adapted to our increasingly digital world. The Riksbank is looking into the possibility of providing an e-krona — an electronic crown — to the market as a complement to bills and coins. That the central bank is addressing this challenge is a sign that it is taking a proactive role in shaping the future payment system. But we should note that the step towards realising this is not an easy one, and there are many challenges — including resistance from commercial banks — that must be overcome.

But what about Bitcoin? Surely this was a major factor in hastening the decline of cash in Sweden? Introduced to the world by the mysterious Satoshi Nakamoto in 2008, Bitcoin has not yet taken a position in retail payment markets and has, in fact, had very little impact on the use of cash. A well-functioning payment service should — among other things — be based on a stable value, and this is one of the main problems with Bitcoin. Its value fluctuates heavily, meaning that holding or accepting it involves financial risk. You cannot be sure your Bitcoins will have the same value tomorrow as they have today. This is fine if you view Bitcoin as a financial asset, but not if you view it as a payment service.

An efficient payment service is built on the premise that many buyers and sellers accept it and that prices are set in the given currency. First-generation cryptocurrencies — like Bitcoin and Ethereum, first launched in 2015 — have failed here too, and have not yet made their entrance into the public markets for retail payments. Of course, there are the other problems around Bitcoin, such as its high energy usage and the ease with which it can be used for illegal transactions on the dark web.

This is where the next generation of cryptocurrencies — so-called stablecoins — have entered the scene. These are linked to an underlying portfolio of assets that aims to create a stable value. One recent example is Libra, which was announced by Facebook in June 2019. The company plans to launch the cryptocurrency via the Facebook platform, and it will be targeted at people around the world who do not yet have a bank account. So far, the project has encountered many problems and has received justified critique from central banks as well as from founding members. The main criticism relates to concerns about how well Libra will abide by regulations related to, for instance, anti-money laundering, financial stability and consumer protections. In my opinion, we should welcome initiatives like this, as the markets for globally viable payment solutions need to be improved, and innovations such as Libra could show us the way forward — providing, of course, that these initiatives follow regulations.

The future of payments

So, what will our way of paying look like in future? Innovation can be stimulated via projects like the e-krona, but public procurement can also be used to meet the challenge of avoiding a digital divide. A good example is the payment solutions for immigrants introduced by the Swedish National Debt Office. In essence, this is a debit card procured by the state and loaded with a specific value before being given to beneficiaries. Innovation agencies, like Vinnova in Sweden, should be transformed into stimulating innovation in digital industries.

Another challenge is growing platforms for payments — processing, settlement and services — so that they are effective on the international scene. Nordic banks are launching an internationalisation project called P27, which aims to achieve just this, and the European Central Bank is launching a new European platform for instant payment called TIPS.

Business and consumers have a key role to play in the future of cash, and it is important that they are given the necessary information to make informed decisions. To this end, I have argued that governmental agencies and education forums — and businesses for that matter — need to take the lead in launching campaigns aimed at helping people and companies to understand the challenges and opportunities in a world where all payments are digital.

The future is without doubt digital. But it is still not clear who will be the main provider of payment services and money. As central banks and private companies develop their own solutions, who will ultimately prevail?

This article first appeared in the RSA Journal Issue 4 2020