Lars Nyberg: The Swedish card payment market - current challenges and
future developments
Speech by Mr Lars Nyberg, Deputy Governor of Sveriges Riksbank, at Scandinavian Card Markets,
Stockholm, on 3 February 2003.
* * *
To begin with, I would like to thank you for the invitation to participate in this conference. Given the
short time at my disposal, I will confine myself to discussing a few of the salient features of the
evolution of the card payment market in Sweden, identifying also the forces that appear to have driven
this evolution. Judging from the latest innovations in this area, I will touch upon possible future
developments. Lastly, in my capacity as central banker, I will talk about some relevant policy issues.
The evolution of the card payment market in Sweden
Let me start by making a few observations concerning the market development in Sweden.
1. Card payments have grown rapidly, but the use of cards is still far behind that of the other
Nordic countries (fig.1). Between 1990 and 1997, the number of card payments per capita in
Sweden grew at a steady pace, picking up speed quickly at the end of the decade. Still,
when the new millennium started, the number was no more than half of what can be
observed in the other Nordic countries. This is somewhat surprising, considering that
payments systems and payment patterns are otherwise quite similar in these countries. We
have no convincing answer to why Swedish consumers are less willing to use card payments
than are their Nordic neighbours. One possible explanation is that card payments are, or are
just considered to be, more costly, more complicated or more risky, in Sweden than
elsewhere, by consumers or by terminal keepers. I will come back to this issue later.
2. Swedish consumers use debit cards rather than credit cards (fig. 2). Concerning preferences
between debit and credit cards, clearly, Swedish card users favour debit cards, both in terms
of value and volumes of transaction. In the year 2001, the number of debit card transactions
amounted to just above 80 per cent of the total. Charge cards dominate the remaining
20 per cent. Credit cards with revolving credit arrangements do not seem to appeal to
Swedes. In this respect, Swedish consumers' preferences are in line with those of
consumers in the other Nordic countries and with those of continental Europeans. On the
other hand, consumers in Anglo-Saxon countries seem to demand pure credit cards to a
larger extent. Cultural factors may account for the different preferences between credit and
debit card products. At least in Sweden, consuming out of credit is still considered to be
somewhat irresponsible. In the old days of bank regulation, banks were not supposed to give
credit for consumption purposes since available credit recourses should be channelled into
productive investments.
3. The use of checks is negligible (fig. 3). Cards have increased their share of non-cash
payments from less than ten per cent in 1990 to nearly 30 per cent today. The increase is
partly reflected in a corresponding decrease in the share of check payments. In fact, checks
have virtually disappeared from the Swedish payment market. However, the rapid decrease
in the use of checks can not explain the growth of the card payment market. The share of
checks has never been large in Sweden, since giro payments have always comprised a
large share of non-cash payments.
4. Cash is still the king (fig. 4). Given the rapid increase in the use of cards in Sweden,
particularly in the late 1990's, cash should have been expected to fall in importance. This,
however, does not seem to have happened. The use of cash, measured as the ratio of the
value of currency in circulation (M0) and GDP, fell during the first half of the decade, but
have been fairly constant since then, lately even increasing somewhat. In the other Nordic
countries the ratio of currency to GDP has been fairly stable, with the exception of Norway,
where it has been falling. Furthermore, the level of cash to GDP is considerably lower in the
other Nordic countries, perhaps reflecting their more widespread use of cards. In a longer
perspective, starting 1950, the use of cash in relation to GDP has been falling considerably
also in Sweden, from 10 down to four percentage points (fig.5).
5. Cash cards have not been successful (fig. 6). Chip cards with e-money function may be used
in transactions of low value and for acceptance at smaller points of sale. This, however, is
the part of the market where cash is most appreciated. The national roll out of the so-called
Cash card occurred in Sweden in the latter part of the 1990s. Three of the four largest banks
in Sweden, that together comprise the lion share of the card payment market, stand behind a
common technology. The introduction has not been a success. Up to now, the growth in the
use of the new product has been very modest and recently even negative in terms of number
of transactions. However, the development of card based e-money is still in a very
embryonic stage of development. Caution ought to be applied in drawing too rapid
conclusions on its future evolution.
In conclusion, although the growth of the card payment market during the last decade has been large,
there seems still to be considerable potential for expansion, mostly through displacement of cash
payments, and most obviously in Sweden (fig. 7). Why are Swedes so suspicious of cards and such
lovers of cash? We do not know for certain. I can just assure you that it is not due to successful
marketing of cash by the Riksbank, even though we issue the currency and live on the seignorage.
Cash has many advantages, no doubt about that. It is expensive to use, however, and in one way or
another we all as bank customers pay for the use of it. For reasons of security and efficiency in retail
payments, a more widespread use of cards would be desirable.
Forces driving the development of the card payment market
The forces of supply and demand shape the evolution of the card payment market in much the same
manner as they influence the evolution of any other market.
Demand is influenced by factors such as acceptance, convenience and relative prices. It has
sometimes been argued that demand for payment instruments is not price elastic - that relative prices
do not greatly influence users' preferences for different payment instruments.1 The Nordic experience
does not support this view. The rapid expansion of card payments and other electronically initiated
instruments in Norway clearly point in a different direction. Norwegian consumers' shift of preferences
followed immediately after banks' change of pricing strategy, where (among other changes) a price
was put on the use of cash (as a small fee on ATM withdrawals). In Sweden, as previously noted, the
use of checks fell sharply when banks started to charge for their use, although the charge was fairly
small. Of course, good substitutes must be readily available. But if alternative ways of payment are
present, fees seem to matter and matter a lot. So, one may suspect, if and when banks feel ready to
charge for the use of cash, this is likely to give a big kick to the card market.
On the supply side, costs are obviously important. Clearly, the technological development of IT and
telecommunications has helped in cutting costs. Economies of scale and network effects are other
important supply factors. Economies of scale imply that cost per transaction fall when the number of
transactions increases. Network effects imply that the number of terminals that accept a particular card
greatly affect the utility of the user. The larger the number of payment terminals that a bank can install,
the happier will be the users and the larger the share of the card payment market the bank will have.
Economies of scale and network effects both increase the incentives for co-operation between card
issuers in establishing common standards and communication between systems. In Sweden and in
the other Nordic countries as well, banks have a long tradition of cooperation in using common
infrastructure and implementing common standards, perhaps more so than in many other regions.
This is likely to have contributed to the rapid expansion of the card payment market in the Nordic
countries. There are some country specific differences, though. As should be expected, the number of
payments per capita increases with the number of terminals installed (fig 8). At least for Sweden, there
seems to be remaining positive network effects that may further expand the market.
1
See for example Humphrey, Pulley and Vesala (1996): "Cash, paper, and electronic payments: a cross-country analysis",
Journal of Money, Credit, and Banking, Nov. This is an econometric study of different factors affecting the choice of
payment instruments. The price coefficient had no statistical significance in this study. However the data set was poor. This
result was later revised in the Norwegian study: Humphrey, Kim and Vale (1998): Realizing the gains from electronic
payments: costs, pricing and payment
choice, Norges Bank.
Consideration of risk
Risk considerations are always important in card transactions. Consumers in countries where
criminality is low, such as Switzerland and Japan (and Sweden for that matter), tend to favour cash
payments to a larger extent than in countries, where the risks of carrying large amounts of cash are
higher. Problems in the handling of risk are also likely to be behind the disappointing development of
e-commerce. The evolution of a digital market is believed to have been partly hindered by the lack of
sufficiently secure payment instruments. For card issuers and banks matters of security are crucially
important. There is, as always, a trade off between risk and the cost of avoiding risk by adopting
security enhancing technology. When technology becomes less costly, more of it will be used.
E-commerce is likely to benefit from that development.
Incentives to reduce risks are important and drive the current technological developments in the
market. Costs for fraud are very high. Moreover, these costs are increasing in most countries.
Although card frauds are relatively less frequent in Sweden than in many other countries, the need for
enhanced security features at the international level will make Swedish card issuers follow the global
trend. If we do not, we take the risk of becoming a secure haven, attracting large numbers of card
fraudsters. Whether Sweden should have been even quicker to adopt the new technology is a matter
for discussion.
Currently we are facing the transition from magnetic stripe cards to chip cards. The migration to the
global EMV standard (EMV= Europay, MasterCard & Visa) is on its way. The first pilot will start this
spring; the national roll out will follow in the autumn. It is not easy to forecast how long the technology
migration will take. All cards have to be replaced with the new EMV compatible chip and payment
terminals need to be upgraded. This process may take some time. Market players expect that the
change of rules announced by Visa and MasterCard regarding the distribution of credit risks, to be
implemented from January 2005, may considerably speed up the migration process (Currently card
issuers bear full credit risk, but from that date, credit risk will fall on the party, card issuer or bank not
implementing the EMV technology). I trust that the introduction of the EMV cards will be thoroughly
covered by the afternoon speakers, so I will leave the subject here.
Central Bank Involvement
Why should a central bank care about the card market? Is the market not better handled by the private
sector without public intervention?
According to the law, the Riksbank is to promote a safe and efficient payment system. Like most
central banks, the Riksbank is heavily involved in large value payments, running and providing credit
to the RIX-system, where payments can be made in central bank money. Here the central bank role is
simple to explain. But why should we be involved in the small value payments handled in the card
market? Safety problems, although they may be important, are usually not systemic in nature. And in a
well-functioning market, economic efficiency should be attained by the market itself, without public
intervention.
In my view, central bank involvement is appropriate only in the cases of market failure, coordination
problems of some magnitude or the presence of obstacles outside the market itself. Usually, they
relate to efficiency rather than safety.2 Typically, we would ask questions such as
1. Are there legal and regulatory impediments to market development and innovation?
2. Are market conditions competitive?
3. Are security and operating standards and infrastructure arrangements efficient?
4. Are settlement services, however provided, safe and efficient?
To answer these questions, we follow the market for retail payments and we try to exchange
information and cooperate with other relevant public and private bodies. In the card payment market,
issues of competition, pricing and security are of particular importance. I shall comment shortly on the
first two of these.
2
Even though systemic risks are not an issue in the card market, other risks may be highly relevant. Operational risks in
particular are important since operational disturbances may give rise to substantial costs for society as a whole.
The market for card payments is characterised by the presence of strong network effects in
combination with economies of scale. To exploit these effects players that otherwise compete with
each other have to cooperate. This cooperation is manifested in common standards and a common
infrastructure. It is an important cooperation, which has the potential of providing inexpensive and
convenient payments services to the public in a way that would otherwise be impossible.
There is, however, another side of the coin. High market concentration may reduce the competitive
pressure and thus the functioning of the market. Market power may be abused. The effect from
concentration on incentives to invest in research and development is ambiguous. High concentration
may also make it difficult to establish new payment instruments and systems. It is not obvious that the
market by itself can strike the right balance between cooperation and competition.
Turning to the pricing of card products, the Riksbank, in dialogue with the banks, has launched a
research project related to retail payments. The aim is to investigate how well the price structure for
retail payment services reflects the underlying production costs for these services. When prices for
retail services, such as the use of cards or cash, are transparent and reflect the cost of production,
they give incentives to efficient use of each instrument. Again, if actual costs of cash services were
transparent to consumers and if the use of cash was priced according to the cost of providing cash
services, the use of cards would probably increase substantially. I am sure that we will move in that
direction, even though consumer acceptance of paying for the use of cash will increase only at a slow
pace.
Thank you.
Number of card payments
per capita and year
100 100
80 80
60 60
40 40
20 20
0 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Sweden Finland Norway Denmark
1
Shares of number of transactions with
debit, credit and charge cards
100%
Charge cards
Charge cards
90%
Credit cards
80%
Credit cards
70%
60%
50%
Debit cards
40%
Debit cards
30%
20%
10%
0%
1997 2001
Shares of payment instruments
of total number of non-cash payments
2000
1990
direct debits 4% checks 0,2%
direct debits 8%
checks 15%
card payments 29%
card payments 7%
credit transfers 63%
credit transfers 75%
3
M0/GDP
Percent
5% 5%
4% 4%
3% 3%
2% 2%
1% 1%
0% 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Denmark Finland Norway Sweden
4
Long term M0/GDP trend in
Sweden
Percent
12%
10%
8%
6%
4%
2%
0%
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
Number and value of
transactions with Cash card per
millions SEK billions
year
4,5 0,3
4,2
4,0
0,2 0,2 0,2
3,5
3,0
2,9
0,2
2,5
2,0 2,0
0,1 0,1
1,5 1,5
0,1
1,0
0,1
0,5
0,0 0,0
1998 1999 2000 2001
number of transactions (millions) value of transactions (SEK billions)
6
Card payments per capita and year
and MO/GDP, average 1995-2000
70
Denmark
60
Finland
capita
50
per Norway
40
payments
30
Sweden
20
numbercard
10
0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
M0/GDP, percent
7
Number of terminals and number of
transactions per capita and year,
average 1995-2000
70
Denmark
60
Finland
capita
50
per
Norway
40
30
transactions
of
Sweden
20
Number
10
0
0 2 4 6 8 10 12 14 16 18
Terminals per 1000 inhabitants
Central Bank involvement
1.
Legal and regulatory barriers?
2.
Competitive market conditions?
3.
Efficient infrastructure and standards?
4.
Safe and efficient settlement services?