A bumpy road ahead - transformation of payments leading towards cashless societies

The world of payments is rapidly moving away from cash and into non-cash transactions which is in line with a general digitalisation of our societies

Global non-cash transactions increased 14 percent between 2018 and 2019 and reached a value of 708.5 billion USD with a particular growth in the Asia-Pacific region. Even if COVID-19 slowed down the growth rate of non-cash transactions, we can expect non-cash transactions to continue to grow and the World Payments Report 2020 predicts a 55 percent increase of non-cash transactions in the period 2019 – 2023. This is driven by ecommerce, innovative payment services that are continuously adopted by users. Even if the global trend away from cash is clear, we must acknowledge that levels and speed differ between countries where some show a high use of cash – like Spain, Greece, and Portugal – while others – like Sweden, Norway, and Denmark – show very low use of cash. The transformation gains momentum from factors as strategies by central banks – like the Riksbank of Sweden and the European Central Bank – to pursue the idea of digital cash issued by central banks, the COVID-19 pandemic that clearly has had a negative effect on the use of cash, as well as demographics since it is mainly elderly that uses cash. All in all, we can expect a continued decrease of the use of bills and coins on a global scale.

One fore-runner towards a potentially cash-less society is Sweden where the use of cash peaked in the end of 2007. Today the value of cash in circulation is around 1 percent of GDP and most signs indicate the reduced use of cash will continue. The short story of Sweden is: that the legal system allows merchants to refuse accepting cash as a mean of payments; that the system for cash handling was outsourced from the central bank of Sweden – the Riksbank – to private actors and the use of cash thereby became decided by market forces; that banks’ did not make money on cash handling services and thereby reduced the service level connected to cash; and, finally, that merchants and consumers prefer innovative and cost-efficient electronic payment services over cash. In hindsight, the transition towards this situation can be understood as a straightforward process with a clear aim but this is not correct. Instead, we must understand it as a combination of independent decisions and steps based on their own, individual logics that together formed a strong transformation process. And, it has also brought problems.

Even if the majority of Swedes and especially young and middle-aged in cities mainly has seen advantages in non-cash payment services, people and businesses depending on cash face increasingly grave challenges. A recent report from the County Administration Board of Sweden come to the conclusion that access to ATMs and cash deposit machines is continuously decreasing in Sweden. This leads to problems for specific groups in the society. Elderly are the most cash-intense users and not always in favour of innovations but there are also other groups – like people with disabilities and immigrants – that prefer cash over electronic payments and therefore face difficulties. Many in these groups are not only accustomed to and prefer cash but may also have problems using cards and mobile payment services since codes may be forgotten, disabilities may make it difficult to punch codes, and poor eye-sight may make it difficult to see what one should do when using the service. Another group that has suffered are merchants in rural areas where telecom systems and Internet connection is unreliable and cash handling services are poor, which has led them to a situation where neither cash nor card payments are reliable. These problems led the Swedish Parliament to institute a new law becoming operative in 2020 which forces the largest banks to provide a well-functioning system for cash handling services to people and merchants in all parts of Sweden. Hopefully, this will help the groups that are most dependent on cash.

Another effect of the decline of cash is that the central bank of Sweden – the Riksbank – already in 2017 decided to start studying how electronic cash issued by the Riksbank in the form of an ekrona, aka Central Bank Digital Currency (CBDC), could be developed, which challenges and benefits this bring. One reason being to understand the role of the Riksbank in retail payments if none uses cash. Instead of being a central actor issuing cash, the central bank’s role in retail payments may become that of a secondary actor mainly providing liquidity to banks who then issue bank money directly to consumers and merchants. Central bank money would in this case not be accessible to consumers and merchants. One important reason to start investigating and proto-typing an ekrona was to thereby learn which roles the Riksbank may take in a retail payment system without cash. A clever decision, if you ask me.

The ekrona project recently released a report where they come to three main conclusions. First, that the technology, which is based on decentralised ledger technology, is promising as a possible solution for uniquely identifiable digital cash but that there are unanswered questions related to demands on scale and security. Second, different types of demands, such as whether it should work off-line or not, mean that different types of solutions for storage, tokens and keys will have different levels of performance. Third, a solution based on blockchain and tokens would require a new and complementary infrastructure for retail payments which operates side-by-side with existing system. This would on the one hand increase resilience of the entire system while at the same time bring additional costs. In the end, it will be the Swedish Parliament that decides whether the Riksbank will launch an ekrona or not, but even if this decision would be made, we are not likely to expect a launch before 2024. And the jury is still out on the question of which value such a solution would bring to consumers and merchants as today’s solutions – card payments, mobile payment apps like Swish and invoice payments – work well and are quite popular. But it is of course also difficult for a person or a merchant to see potential advantages and disadvantages with a product that still is in the drawers and at the same time built on technologies that few yet have understood.

Looking at the ekrona from the perspective of central banks it is, on the other hand, relatively easy to see potential benefits. First, if the central bank is no longer active in retail payments, the door is open for commercial actors to govern this industry with their own interests in the forefront. Even if still being subjected to strict regulation, the role of the central bank as the anchor would be lost and private actors would potentially have more room to influence this industry. And especially actors with global ambitions like those behind cryptocurrencies as Bitcoin or Ethereum, or those behind DIEM, a stablecoin based on blockchain technologies, may find it easier to radically transform the payment industry. Ironically, the ambition to create a globally applicable digital cash in the form of Bitcoin is based on the age-old idea that metals – in this case gold – constitute the most stable value on the earth and therefore a role model for Bitcoin. As money of today has become ‘fiat money’ where the value is based on the trust users has in the issuers and the overall system, Bitcoin uses a gold analogy to create trust. That is why one can ‘mine’ Bitcoin and that there is a limit on the total number of Bitcoins that can be mined. It will be interesting to see if King Midas of today manages to solve the challenge to create digital gold just by touching the keyboard, and thereby make the 21 million Bitcoin limit breakable. A radical break-through for cryptocurrencies and stablecoins issued by private firms would definitely make central banks less important.

Second, to avoid a digital divide where people traditionally using cash meet difficulties when cash disappears and electronic services are growing, an ekrona could be a tool to ensure digital inclusion for all. I write ‘could’, and I mean could, because this is not to be taken for granted. Such a development would require an ekrona that is easy to use, efficient, more or less effortless to access as well as trustworthy for all groups in our society. A challenge not to underestimate! There are also challenges connected to an ekrona. Could it destabilise the payment system or even the banking system if savings are easily and swiftly moved from banks to ekrona accounts? Could bank-runs become more frequent and swifter if capital owners quickly and rapidly could transfer their money from bank accounts to CBDC accounts? Would a CBDC mean that central banks start competing with commercial banks? Questions are many but the learning by central banks in this process is invaluable and that alone – if you ask me – motivates the decision by central banks to pursue a potential launch of a CBDC.

Then to the million dollar question (or is it the 30 Bitcoin question?): what will happen next? Even if Sweden is somewhat unique in its low use of cash, we see that many countries want to move in the same direction. Some – like China, Sweden, and the European Union, are actively pursuing the launch of CBDCs while others – like El Salvador – are considering making Bitcoin legal tender. No matter which of these actions you may prefer, both imply a reduction of the use of cash. And young people are today growing up without never having to use a bill or coin but instead build their lives on digital versions of money. In some countries cash is no longer King and in most other countries there is a growing rebellion in the making with the aim to force cash to abdicate.

About Niklas Arvidsson

Niklas is working as Associate Professor at KTH Royal Institute of Technology. He authored the book ‘Building a Cashless Society – The Swedish Route to the future of Cash Payments’ and has held talks on why Sweden is becoming a cashless society in Thailand, Portugal, France, Japan, Poland, UK, Denmark, and Sweden.

About KTH Royal Institute of Technology in Stockholm | KTH

KTH Royal Institute of Technology in Stockholm was founded in 1827 and has grown to become one of Europe’s leading technical and engineering universities, as well as a key center of intellectual talent and innovation. KTH is Sweden’s largest technical research and learning institution and home to students, researchers, and faculty from around the world dedicated to advancing knowledge.