Lars Nyberg: Time to change cash to cards?
Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at the 9th annual
Nordic Card Markets conference, Stockholm, 20 January 2010.
* * *
More often than not, the Riksbank is associated with the objective of maintaining price
stability, which is usually interpreted as attaining a low and stable level of inflation. However,
promoting a safe and efficient payment
we also have another objective, namely system.
What this means in practice is less obvious, but our entire responsibility for financial stability,
which has undoubtedly been in focus over the last 12 months, in fact rests on this wording in
promoting the development of safe and efficient
the current legislation. This task includes
payments. This is why we take an interest in cards and cash and it is also why I am here
today.
The Riksbank's responsibility for the payment system also includes having the sole right to
issue notes and coins. This may seem self-evident today, but it has not always been the
case. Up until the early 1900s, the private banks were entitled to issue notes under the
supervision of the Riksbank. The view of what the Riksbank should do and what private
market players are expected to be responsible for has thus developed over time. Up until
only a few years ago, the Riksbank was also responsible for the storage and, partly, the
distribution of notes and coins throughout the country. This phase has now been taken over
by the banks in line with the model in other countries and the Riksbank is only responsible for
the wholesale phase.
Developments in the field of payments can be viewed in a similar way. As long as payments
are made using notes and coins it is the Riksbank that guarantees the confidence of the
means of payment. However, as an increasing number of payments are made using cards,
this role is increasingly becoming the responsibility of the banks and card companies. It is
against this background that I intend today to speak about the Riksbank's view of the
development of safe and efficient payments, what we are doing in our area of responsibility
and what we hope various private players will do.
The payment behaviour of the Swedes
value
Swedes increasingly use cards to make payments. Over the last ten years, the of the
card payments made has increased fivefold, while the number of card payments made has
increased eightfold. For couple of years now, the value of the card payments made has also
exceeded the value of all cash payments. The value of all card payments is almost twice that
of all cash withdrawals.
In comparison with our Nordic neighbours, we previously used cards to a lesser extent in
Sweden. This is no longer the case; cards are now used to more or less the same extent in
Sweden, Denmark and Finland. In Sweden's case this means that we have really caught up
since the beginning of the millennium when we used cards only half as much as these Nordic
neighbours.1 Cards are still used to a greater extent in Norway than in the other Nordic
countries.
All-in-all, this development means that the use of cards has now reached such a level
throughout the Nordic region that a serious disruption that affects the entire card system, or
large parts of the system, would have serious consequences for the ability of people to make
payments. Cash could no longer replace cards if the card systems were to break down. If
card payments do not work, then the entire payment system will not work satisfactorily either.
The Riksbank's responsibility for a safe and efficient payment system therefore means that
we also have an interest in ensuring that card payments work safely and efficiently.
To get more up-to-date information and to learn more about how the Swedes pay, the
Riksbank conducted a survey towards the end of last year. The aim of the survey was to
determine how people choose between different means of payment and the factors that
affect these choices. As similar surveys were conducted in 2006, we also wanted to see
whether the payment patterns had changed over the three years between the surveys.
According to the surveys conducted in 2006, approximately half of the interviewees used
cards as the means of payment for at least 80 per cent of all purchases.2 Today, almost
twothirds of the interviewees use cards as the means of payment for all purchases.
The great majority of the interviewees in the autumn survey, 95 per cent, had a debit card. A
much smaller percentage, 40 per cent, had a credit card. Debit cards were used in 96 per
cent of all card payments. This is an increase since the survey in 2006, when debit cards
were used for 80 per cent of all card payments. Credit cards thus seem to have become
relatively less important - at least in terms of the number of payments.
Despite the fact that card payments predominate in terms of both the number and value of
payments, the Swedish public still prefers cash to cards for purchases of less than SEK 100.
Our survey shows that as many as 22 per cent choose cash for purchases between SEK 100
and SEK 500. For amounts under SEK 100, cash is preferred by 63 per cent. There are no
fully-comparable figures from any of the surveys carried out in 2006, but in 2006 the
"average consumer"3 did not choose to pay by card until the purchase sum exceeded
SEK 123.4
So what governs the choice between cash and cards? The most important factor, according
to our survey, is that the means of payment is perceived as being convenient. Those who
prefer cash also say that to a certain extent it may be a case of old habits dying hard, or that
they happened to have cash on them and therefore used it. Those who prefer cards say
instead that one of the reasons is that they do not like to walk around with cash. A
comparison of the interviewees' attitudes to cash and cards also reveals that cash is
perceived as being more secure, while cards are seen as being somewhat less secure.
There is also a clear generational aspect to the choice of means of payment. The youngest
age group, those under 25, feel a greater sense of security when using cards than the other
age groups and are more than willing to use their cards to pay small sums. Those who are
45 or older pay with cash to a greater extent. The oldest age group, those who are 65 or
older, prefer to pay with cash, even when they buy something that costs over SEK 500. This
tendency is the same now as it was in the previous survey.
What does it cost to pay?
Should the trend towards increasing card payments and decreasing cash payments be
regarded as positive or negative? One way of attempting to answer this question is to
consider the cost to society of various payments. If the payment system is to be efficient,
these payments should reasonably cost as little as possible.
A study of data from 2002 conducted by the Riksbank revealed that each cash payment cost
society an average of SEK 4.6, while each card payment cost SEK 3.0. The costs associated
with the use of cash included not only the handling and transport costs of the banks and
shops but also an estimate of the time consumers spent on fetching and taking care of the
cash. The variable costs are considerable, that is it costs more to handle a large sum than a
small sum. Cash has to be counted, transported and stored. This is not the case with cards.
There are major fixed costs in the form of an infrastructure that includes terminals and
communication lines, but the variable costs are small. It is not more expensive to handle a
card payment of SEK 50 000 than a payment of SEK 50.
From this it was possible to calculate that, in 2002, it cost society less when payments were
made using cash providing that the sum involved was less than approximately SEK 70. For
sums higher than this it was cheaper to use cards.
If we now compare this with the choices that the consumers actually made, the conclusion is
that in 2002 it would have been better from the point of view of the Swedish economy if the
consumers had made more payments by card and fewer payments in cash. From society's
point of view, it was profitable to pay by card when the sums were higher than SEK 70, but,
as was the investigation from 2006 made evident, the "average consumer" nevertheless
chose to wait until the sums were higher than SEK 123.
Eight years have now passed since the study was conducted and it is much more likely that
the costs of using cash have increased rather than decreased. For example, the costs for
increasing the security of transportation and ATMs have been substantial. On the other hand,
available evidence suggests that a card payment costs somewhat less today. One reason for
this is that the shops' costs for getting a card payment redeemed seem to have fallen due to
increased competition between the card acquirers. The level at which it becomes more
advantageous to the economy to use cards rather than cash has therefore probably fallen
below SEK 70.
The survey we conducted last year shows that we use cards to an increasing extent and for
smaller and smaller payments. It is not unlikely that today's "average consumer" would
choose to pay by card for an amount below SEK 123. At the same time, the level at which
card payments become more efficient for society has probably fallen below SEK 70. But
which of these figures has fallen furthest? This is something that we do not know. It is thus
difficult to say whether consumers are still using more cash than is economically efficient.
The Riksbank will follow up the previous studies to get a more exact picture of the use of
cards and cash and of the economic costs of producing the different payments.
Highlight the charges!
It would not be so strange if consumers were to choose to make more cash payments than is
economically efficient. In general, consumers have no idea of how much it costs to produce
payments. Our survey shows that knowledge concerning what the different means of
payment actually cost is limited. Some 20 per cent of the interviewees were unable to say
whether it costs them more to use cards or cash. Some 45 per cent of interviewees believe
that cash is most expensive for the retail sector and the banks.
We already know that it is difficult to assess the costs of various types of payment.5 They are
never clearly disclosed. But the costs are there even if they are not apparent. The retail trade
pays charges to the banks for cash and for card payment services, but does not usually price
these services directly to its own customers. The costs the retail trade has to bear in
connection with payments are instead transferred to the consumers by means of general
price increases on goods. If the customers were also asked to pay the costs of the payment
itself when they pay for the goods they have bought, they would probably choose to pay
more by debit card and less in cash or by credit card.
Previous experience in both Sweden and Norway shows that the choice of means of
payment is price-sensitive. In Norway, electronic payments, including card payments,
increased very quickly after the banks introduced charges better reflecting the actual cost of
the various means of payment. Among other charges, there exists in Norway a small charge
for cash withdrawals from ATMs. In Sweden, we virtually stopped using cheques when the
banks began to charge for them. These two examples show that consumers' choices
between the various means of payment change significantly when they become aware of the
costs.6
In the autumn survey, we asked the interviewees how they would react to a charge being
levied in connection with purchases using cards or cash. Their responses revealed that there
is certain degree of tolerance for those retailers charging for card payments. A third of the
interviewees said that they used their cards despite a charge being levied. On the other
hand, there was a lot of opposition to the idea of levying a charge in connection with cash
purchases or cash withdrawals. A majority of the interviewees said that in this case they
would make more payments by card and reduce the number of cash withdrawals. Common
to all types of charge is that they arouse strongly negative reactions.
It is not up the Riksbank to decide how the retail trade or the banks should distribute the
costs for different forms of payment. But there are considerable gains to be made from a
pricing model that better reflects the underlying costs - both for society and the companies.
Consumers do not realise that they always pay the costs of their payments. Other countries
have begun to charge for expensive cards in the retail sector and for the use of cash in the
form of charges for ATM withdrawals. This has affected payment patterns. The introduction
of a similar system in Sweden would, in all likelihood, also affect the choice of payments
made in this country.
Secure card payments
However, it is not only the cost that is important for payments, but also security. And this is
where card payments have a technical disadvantage in relation to cash payments. Security is
important to all types of card transaction, not least when private individuals use cards for
payments to different types of webshop, which is becoming increasingly common. Despite
the fact that the card industry has developed new, secure ways of making card payments
over the web, the survey we have conducted shows that the majority of people still reveal
sensitive card information in connection with purchases. According to the survey, only 18 per
cent of web purchases were made using the safe solutions for card payments that are
available. In as many as 71 per cent of the transactions over the Internet, the customers
revealed their card numbers without using any additional safety measures. This is a major
source of the card fraud that occurs over the Internet.
The Ministry of Justice is currently considering a new proposal on the regulation of
unauthorised transactions. This aims to clarify how responsibility for a loss should be divided
between the customer and the bank in the event of fraud. New limits for the customers'
deductibles and right to compensation are also proposed. In order to determine how large a
part of the loss the customer should be responsible for, it will be necessary to assess how
negligent the customer has been. The customers must therefore be informed of the
definitions of the different degrees of negligence. If the customers are unclear about the
rights and obligations they have, this will probably lead to fewer of them wanting to use cards
in the future.
The new regulation will increase the cardholders' responsibility. The banks and the card
industry can help by intensifying their efforts to protect customers against unauthorised
transactions. One element of this may be to accelerate the phase-out of magnetic strips and
replace them with chips or similar technology. The requirement that all card terminals and
ATMs should use chips is a good first step as skimming and the use of stolen cards
constitute more than half of all the cases of card fraud in Sweden today.7
It is important that the customers feel that paying with cards that contain chips is simple and
convenient. A uniform standard for how cards should be placed in card terminals can save
time and reduce the risk of customers leaving cards behind after purchases have been
made. The principle should be the same as for cars: Irrespective of the make of car, we know
where the accelerator and the brake pedals are placed!
Better reporting of the number of frauds and how much they cost the card industry would
also be desirable. It is after all the cardholders that ultimately have to foot the bill and it is
reasonable to expect that all the relevant information should be available to them. Such an
approach would also increase the cardholders' confidence in the cards. In France there is a
forum for representatives of the authorities and the card industry. They work to inform
customers, shop owners, car issuers and other authorities about the security levels in the
various card systems. They also provide information about the extent of card fraud in
France.8 Wouldn't it be a good idea to introduce this in Sweden too?
The Riksbank and cash
But what, as the issuer of banknotes and coins, is the Riksbank doing to improve the
efficiency of cash management? Quite a lot has actually happened in recent years.
The Riksbank began five years ago to offer the commercial banks the opportunity to
establish private depots for receiving and distributing cash. Behind this move lay the
conviction that private participants would be able to handle the distribution of cash from the
Riksbank to the banks in a more flexible and thus more efficient manner. On the whole, the
new organisation has functioned excellently. It is, naturally, very important that the depot
owners really ensure that access is satisfactory for all participants requiring cash and that the
conditions for access to the depots are applied fairly. The Riksbank regularly evaluates the
security and efficiency of the new system.
In the autumn, as a further part of the effort to improve the efficiency of cash management,
the Riksbank began planning a new cash management facility near Arlanda. When the new
facility comes into operation in 2013, the present cash management facilities in Mölndal and
Tumba will be closed down. The new facility, which will thus be the Riksbank's only cash
management facility, will be equipped with a lot of modern technology, including a
fullyautomatic warehouse, and will be well adapted to the operations and security requirements
of the future.
Like the privatisation of the distribution system, the facility at Arlanda is a part of the
Riksbank's efforts to streamline cash handling. The 19 Riksbank offices that conducted these
operations 10 years ago will have been reduced to one by 2013. In the same period, the
number of personnel will have been reduced from around 300 to approximately 10 people.
The Riksbank also recently evaluated the use of cash in Sweden and concluded that the
current Swedish banknote and coin series is becoming outdated. There is a need to further
develop the security details. It may also be sensible to make the relatively heavy Swedish
coins lighter.
Another problem is that the level of coin circulation is low. A few years ago, every Swedish
household had an average of SEK 850 in coins stored in a bowl, jar or money box. It is
hardly likely that this figure is lower today.
Partly on the basis of this evaluation, the Riksbank has decided that the 50-öre coin is no
longer needed. It will therefore be withdrawn during the autumn and öre will thereafter only
exist as a virtual arithmetical unit. I think it feels rather strange to imagine this virtual öre.
Some of us may still remember being able to buy a 2-öre or 5-öre toffee at the sweetshop.
There were also 25-öre comics and the 25-öre coin was very real. But times change. The
proposal for the new banknote and coin series is that we should introduce a new 200-krona
banknote and reintroduce the 2-kronor coin. Whether the 20-kronor banknote should be
retained or be converted into a coin is also a matter that is being discussed. The final
decision on the new banknote and coin series has not yet been made.
New means of payment
So far, I have mainly spoken about cards and cash. But technology is also developing rapidly
as regards other means of payment.
In Stockholm and a number of other Swedish cities, the SMS function of a mobile phone can
be used, for example, to pay for bus tickets. This is an interesting example of the manner in
which technology can also create new means of payment. We are, as you know, not alone in
using mobile payments, these are already available in highly-developed countries like Japan
and in less-developed countries like Kenya. In Kenya, mobile payments have already taken
over large parts of the payment market.
Sweden is a highly-developed country with a lot of expertise regarding the Internet and
mobile telephony. We should be able to be at the cutting edge of the development of mobile
payments. It will be interesting to follow whether Swedish banks, card issuers and telecom
operators will further develop this payment method, for example by means of real-time
payments9 initiated from a mobile phone.
Real-time payments are already available in the UK. The British company VocaLink has
introduced Faster Payments, a service that processes payments in real time. VocaLink has
also been commissioned by the Swedish payment system BGC to take over the operation
and development of its system. As part of this work, BGC and VocaLink have also examined
the possibility of introducing Faster Payments in Sweden. The banks are already able to
make larger payments in real time via the Riksbank's RIX system, which is an RTGS10
system. In order to enable real-time payments for smaller amounts, discussions are currently
being held between the Riksbank and BGC concerning the provision of special BGC
accounts in the RIX system, which can be used even when the system is closed. The
advantage of this solution is that it would make real-time settlement in central bank money
possible. This in turn would make it possible for private individuals and companies to make
payments to be effected immediately around the clock, seven days a week, using the
Internet banks and, perhaps within a few years, even their mobile phones.
Although it is common today to use mobile phones for many other things than just making
phone calls, our survey shows that private individuals in general are not familiar with the
concept of using their mobile phones to make payments. However, they value convenience
highly and if a new payment method emerges that is more convenient than those that
already exist it may have a major impact. We only have to look at payments through Internet
banks, which almost 80 per cent of the interviewees in our survey use today.
Another new development concerns the return of the Cash Card following its lamentable
disappearance a few years ago. The new Cash Card has been developed by ICA Banken
under commission of the Swedish National Debt Office and will primarily be used to make
those payments that public authorities previously made in cash. There are, of course,
individuals who lack access to cards and, occasionally, even to bank accounts and who are,
consequently, entirely dependent upon cash. This new card differs from the previous Cash
Card in that it cannot be topped up by the holder, only by the issuing party. Otherwise, it can
be used like a normal debit card and will be equipped with a PIN code. The Migration Board,
the Swedish Prison and Probation Service and the Social Insurance Office are a few of the
authorities expressing an interest in the new card, although there will certainly be other
users. It will be interesting to follow the development of this new means of payment.
Summary
Let me round off.
•
We use our cards more and more; we use them more often and for smaller and
smaller transactions. The importance of cards to the safe and efficient functioning of
the payment system has increased significantly. As one of the tasks of the Riksbank
is to promote a safe and efficient payment system, there has been a corresponding
increase in our interest in card payments.
•
It is hardly likely that the costs of using cash have fallen; it is more likely that they
have increased. On the other hand, most of the indications are that a card payment
costs somewhat less today. From an economic point of view the use of cards should
have become increasingly favourable.
•
Few people know what payments actually cost. There are increasingly strong
reasons for the banks and the retail sector to consider how payments should be
priced for customers. Experiences from Sweden and other countries indicate that
consumers are price-sensitive when it comes to the use of means of payment.
Consumers would use less cash if they had to bear a larger portion of cash-handling
costs.
•
The increasing use of cards places increasingly high demands on safety and on the
reliability of the technical infrastructure that supports the cards. Banknotes retain
their value as a means of payment even if the technical infrastructure is off line.
Cards only work when the infrastructure does.
• Private individuals feel a greater sense of security with cash than with cards. If card
usage is to increase, it must become safer to use cards in shops as well as on the
Internet. Clear information on the frauds that are committed can also serve to
reduce uncertainty among consumers.
•
Good technical conditions exist for the continued rapid development of both existing
and new means of payment.
•
The Riksbank's task is to guarantee confidence for cash in society. Confidence in
the cards must be guaranteed by the banks and the card companies. Consequently,
increasing responsibility for this rests with the market participants.