Lars Nyberg: Cash and payments - what lies ahead?
Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at a meeting
arranged by Sparbanksakademin och Handelns tvecklingsrad, Stockholm, 5 February 2008.
* * *
To most people the Riksbank is associated with money. This is not so surprising. We supply
the country with banknotes and coins and on each note one can see the signature of the
Governor of the Riksbank.
But we are not just concerned about banknotes and coins, which are tools to manage
payments. We are also concerned about payments in a much broader sense. This is
because the Riksdag, the Swedish parliament, has decided that we shall promote a safe and
efficient payment system, as one of our tasks. Quite simply, this means that we shall ensure
the financial system in Sweden is constructed in such a way that people (and companies)
can manage their payments in a safe manner - and, moreover, at a reasonable cost. When
we speak of "financial stability", which we do frequently, it is essentially the means to make
payments safe and efficient we are referring to.
It is, of course, no coincidence that the Riksdag has given us this task: If people were unable
to receive their salaries and if banks and companies were unable to make their payments
this would rapidly have a major impact on society. This is why financial stability is about the
way in which banks and financial markets function and how safe and efficient various
technical payment systems are - on a daily basis, but also in crisis situations.
Money is an excellent means of payment - as long as we believe that it has some value.
Should we lose that belief then it only remains for us to begin to exchange goods with each
other and there are many accounts as to how clumsy and costly this is, even in modern
times. This is why the Riksdag has given the Riksbank the task to maintain price stability
However, I do not intend to talk about the inflation target and its background today. Today I
will talk about cash and other means of making payments. And this is where, just like in so
many other areas, technical developments have to a great extent changed reality.
Do you remember the pay packet? When holding wage negotiations, there are still
discussions about "how much money will there be in the pay packet". However, the pay
packet is now a metaphor. Those of us who have seen them in reality are becoming fewer. I
shall never forget when I worked at a sawmill in Ångermanland and "the chief clerk" from the
office came down with the pay packets on Fridays. When one received the pay packet in
one's hand it felt as though one had truly accomplished something during the week. Today
we all have our salaries deposited in our bank accounts, directly transferred from the
employer's account. This is, of course, far more efficient. At the sawmill the "chief clerk" went
to the bank in Härnösand in order to collect the money and then to count it out at the office
before he could walk down to us and distribute the pay packets. It took all day for him. But I
cannot deny that there was a different feeling to opening the pay packet than to opening a
bank statement.
The increased use of bank accounts came to revolutionise payments in Sweden. With the
bank accounts as a base, a number of new instruments of payment developed. Cheques
were based on bank accounts as were the post and bank giro transfer systems. The same is
true of today's card payments and online payments.
So what are the present payment trends? And what do we believe will happen in the future?
Are we, as some have claimed and others have advocated, moving towards a cashless
society? Just under a year ago the headline on the front page of The Economist was "The
end of the cash era".1 Is this scenario reasonable? I shall begin by looking more closely at
what has happened in recent decades in order to reach some kind of answer to these
questions, or at least a qualified guess.
Cash payments have declined in significance
I will begin with cash. Cash payments still account for a large proportion of the number of
transactions in the Swedish economy. But it comes as no surprise to anyone if I say that they
have declined in significance in recent decades. As a per cent of GDP, the share of Swedish
banknotes and coins in circulation (M0) has more than halved since the 1950s, from around
10 per cent to just around 3.5 per cent.2
In the past fifteen years, however, the trend has levelled off. The use of cash has not
declined in the same way as before. M0 in nominal terms has actually increased. If we look
at the statistics for ATM withdrawals, we find that the total transaction value has remained
fairly constant at around SEK 275 billion a year during the entire 2000s. The number of cash
withdrawals has been around SEK 320 million.
Does this mean that we have reached a lower limit for how much the use of cash can
decline? Has the heyday of the account-based payments ended? I do not believe we should
be so sure of that. Cash is still expensive to transport and manage and a heightened risk of
robbery in recent years has not made cash management cheaper. In the end, it is we
consumers who pay the costs in different ways. However, we must probably point out that we
Swedes like our cash more than most analysts believed a few years ago.
How then have the account-based payment instruments developed?
The use of cards has increased rapidly
Card payments have increased rapidly in Sweden in recent years. In ten years the value of
card payments has almost quadrupled and the number of payments by card has increased
sevenfold. Six years ago, in 2002, for the first time ever more card payments were made in
payment terminals than ATM cash withdrawals. In the most recent statistics available, from
2006, card payments in payment terminals were three times more common than ATM cash
withdrawals.
If one calculates in terms of the number of transactions, cards are now the most used
account-based payment instrument. Like cash, card payments are mainly used for payments
that are made at the actual time of the transaction. According to a 2006 Temo survey, 45 per
cent of those questioned used cards as legal tender in at least four of five purchases.3 (3)
The value of an average card payment has almost halved in the past ten years, from around
SEK 730 to around SEK 380. We are then using cards to a greater degree to pay smaller
amounts. In this way cards increasingly appear to act as a substitute to cash. This is
particularly so in the case of younger people, which is indicated in a study recently published
by the Riksbank.4
Moreover, the increased use of cards is an international trend. For instance, if we look at
developments among our Nordic neighbours, we can see that card payments have enjoyed
rapid growth in these countries also.
As regards the choice between debit cards and credit cards, it is clear that Swedish card
users favour debit cards. In 2006, the number of debit card payments accounted for around
80 per cent of all card payments. Charge cards and combined charge cards or credit cards
dominate the remaining share of card payments.
Cheques have disappeared
As I said, card payments have begun to replace cash payments of smaller amounts. They
have also replaced a large number of cheque payments in Sweden. In 1990 every seventh
transaction was paid for by cheque. Cheque payments accounted for just over one-tenth of
the value of non-cash payments. Today cheque payments account for just some tenths of a
per cent of both the value of the payments as well as the number of transactions.
The death of the cheque in Sweden is of interest, for it was quick and unexpectedly painless.
The story is as follows: Over time cheque handling became increasingly unprofitable for the
banks. The costs increased, but none of the banks dared take the initiative to debit
customers for these costs. There were concerns that Swedes regarded payments by cheque
as an inherited right and would, therefore, vocally protest. But this was not the case. When,
at the beginning of the 1990s, one of the banks decided to charge a fee of SEK 15 per
cheque (and the others followed suit) the majority of cheque payments disappeared over just
a few years - and moreover without political convulsions. The reason for this was that there
were excellent substitutes that were free of charge and which were marketed by the banks,
primarily cards and credit transfers. When consumers discovered this, their grief over the
death of the cheque abated.
The United States has always been the promised land of the cheque. By tradition, US
consumers have sent cheques in the post when they pay their electricity or telephone bills,
for instance. The company receiving the cheque has then forwarded it to the bank, which has
then transferred the money and returned the cheque to the consumer. In this manner, tons of
cheques have crossed the American continent daily. But even in the United States cheque
usage has begun to fall.
Giro transfers, other credit transfers and direct debit are used for the larger payment
flows.
Giro transfers and direct debit are used for recurring and, in this context, relatively large
payments such as, for instance, monthly bills, and often with someone with whom one has a
contractual relationship, for example, the electricity company and the telephone company. In
terms of value, giro transfers, other credit transfers and direct debit account for a very large
proportion of the payment flow between private individuals, companies and the public sector.
Previously, they also accounted for a large proportion of the number of non-cash
transactions, but over the past few years more card payments have been made than giro
transfers, other credit transfers and direct debit.
In Sweden today, approximately 80 per cent of households have Internet access. This has
meant that an increasing number of people use the banks' Internet banks. The traditional
account-based payment instruments have been adapted to this new payment channel. In
some banks, more than half of the credit transfers are now Internet-based and this
percentage is increasing rapidly. Increasingly, customers can also receive their bills directly
via the Internet service, the so-called e-invoicing.
Do you remember how one used to queue at the bank or in the post office in order to pay
one's bills once a month? Some still pay this way, but they are an ever-declining number.
Most people who are able prefer to sit in front of their computers to hanging around in a
queue. But it has not just become more convenient to pay, it has also become cheaper.
Payments over the counter, cheques, cash withdrawals and paper-based giro transfers are
expensive to produce. Electronic payments, such as direct debit, transfers via Internet banks
and card payments are far cheaper to produce. It is not so surprising that in the past twenty
years we have to a great extent switched from paper-based to electronic payments.5 This is
surely a trend that will continue.
New developments in the market
Everything I have spoken of here is essentially to do with what we can describe as traditional
forms of legal tender. Even Internet payments are essentially traditional in the sense that
money is transferred between accounts.
During the 1990s there were many, not least within the central bank world, who believed that
electronic money (e-money) would replace if not all, at least a large part of the smaller
payments that are made with banknotes and coins. In somewhat simplified terms, one could
say that e-money is money that has been transferred, for instance, from an account in a bank
to some form of computerised medium, where it is stored and can then be used for
payments. The storage space may be a microprocessor embedded in a plastic card -
socalled smart card - but it may also be in the hard drive of a computer or a central server -
so-called network money.
In Sweden at present e-money is not issued nationwide. However, it has existed. In 1998 a
few of the banks launched the so-called Cash card, which was a prepaid cash card designed
to replace banknotes and coins for transactions entailing small amounts made at small points
of sale. Afterwards, one can say that it was a flop. Consumers never liked it. Maybe there
were too few places where one could recharge the card, perhaps the normal debit cards
were too similar, maybe one believed that the banks should have paid some interest on the
money when it was transferred to the Cash card? Anyway, it was not a success. At most in
an individual year the number of transactions amounted to 4.2 million. The Cash card was
finally discontinued in the autumn of 2004.
However, it is not just in Sweden where developments have been sluggish. Developments
have been slower than expected in the rest of Europe also. There are countries where
prepaid cash cards - similar to our Cash card - are used to a relatively large extent, and
here I am thinking in particular of Belgium and the Netherlands. All in all, however the use of
prepaid cash cards is modest.
What has grown in recent years is the use of so-called server-based network money.
Companies that manage prepaid payments on the Internet, so-called e-payment companies,
have become increasingly common. Neither buyers nor sellers need give sensitive
information - such as card numbers or account numbers - on the Internet by using these
companies. The most well-known e-payment company is PayPal, which is registered in
Luxembourg, but which is active around the world.
Almost exactly ten years ago Stefan Ingves, the current Governor of the Riksbank, held a
speech on the theme "Electronic money from a central bank perspective". He then said that
"the situation today on the e-money front can, put briefly, be described as there being a lot
happening at different places in the world, although a breakthrough on a broad front is still in
the future". This summary can probably said to still hold today.6
But not all development is tied to e-money. Mobile phones are now also used to make
payments. For example, we can pay our bus and underground journeys by sending a text
message. A few seconds later we receive a text message back from the operator, confirming
that a ticket has been purchased and that it can be shown to the driver or conductor. If one
has a prepaid card the cost is drawn directly, otherwise it will be put on the telephone bill.
There are shops that have begun to use smart cards. At a coffee shop chain in Stockholm
one can buy a plastic card for SEK 20 and then charge it with cash in any of the chain's
shops. If one uses the card one receives a discount when buying coffee and sandwiches.
There is also a discount on buns and other items. It is evidently rational management at the
sales outlets and, moreover, is appreciated by the consumers.
We Stockholmers can also take pleasure in the congestion charges, where the fee is
automatically drawn from our bank accounts when our cars are automatically registered
when passing the control points. There are many technical innovations, even with respect to
account-based payments.
And how about the future...?
An important task for us who work at the Riksbank is to assess how the Swedish economy
will develop in the future. The art of making accurate forecasts fills us with respect. I shall
therefore refrain from all categoric statements about what will happen with payments.
Developments are steered by technology and I am no engineer. However, allow me to make
a few reflections and guesses.
• I believe the "cashless society" is as far away as the "paperless society" was when
one once began to speak of it. There will always be a need for banknotes and coins,
although cash transactions continue to decline as a share of GDP. Cash is an
efficient form of legal tender for certain purposes and will continue to be so.
•
The next generation will use cards to a far greater extent than we do at present,
even for smaller transactions. There are banks today which will, with the permission
of the parents, issue simple debit cards to children who are 13-years-old and above.
In addition, payments via text messaging will grow in importance. Mobile phones are
here to stay.
•
Cards will develop technically. They will become safer with chips instead of
magnetic strips and they will have several different functions - identity cards, driving
licences, passports? Technology appears to have no limits here. The opportunities
with wireless communication further expand the areas of use.
•
Use of e-money will grow. Not cash cards, where there are good substitutes, but the
server-based network money. As e-trading increases so too does the need for
secure e-payments.
•
Finally, I believe that paper-based payments will die a natural death, just as cheques
once did. They are expensive for the banks and impractical for consumers. In a few
years we will see them on display at the National Museum of Science and
Technology.
Thank you!