SPEECH
SVERIGES RIKSBANK
DATE:
2017-01-17
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Deputy Governor Cecilia Skingsley
LOCALITY:
World Economic Forum, Davos in Switzerland
Tel +46 8 787 00 00
How the Riksbank encourages
innovation in the retail payments market∗
Speaking points at the session Financial stability, innovation, economic
growth initiative.
We live in interesting times. At least if you are interested in questions
about how financial services can be organized in a society. Technological
innovation are driving change, but so are economic logic and regulatory measures.
With change come new opportunities and new risks. We can be sure of
that. But that is pretty much where certainty ends. What we don't know is
the full potential of these new opportunities, which of them will actually
materialize and consequently, which stability risks we will be struggling
with in the next decade or so.
My message to the regulatory community is that we must be ready not
only to talk about these matters, but also to walk the talk if we want to
have an impact on this transformation.
Let me illustrate with an example. In particular, I would like to share with
you our experiences from Sweden and how the Riksbank has encouraged
innovation in the retail payments market.
As you may be aware, Sweden is a low cash society on the verge of
becoming a very, very low cash society. Decreasing cash usage is, of course,
mirrored in increasing use of electronic payments. This phenomenon has
gained some interest in international media over the last couple of years.
Let me give you some figures: The value of cash in circulation in relation to
GDP has decreased steadily from approximately 10 per cent in 1950 to
around 1.5 per cent today. Over the past decade even the nominal amount
of cash in circulation has decreased, which is quite unique. The decrease
has been substantial, between the peak in 2007 to 2016 the number of
outstanding notes and coins decreased by more than a third. Most of this
decline has taken place in the last two to three years, driven partly by
changing consumer habits, partly by our ongoing changeover of banknotes
and coins.
Value of banknotes and coins in circulation
SEK billons (annual average) Cash in Circulation/GDP
120 12,0%
100 10,0%
80 8,0%
60 6,0%
40 4,0%
20 2,0%
0 0,0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Nominal value (SEK bn, left scale)
Value in relation to GDP (per cent, right scale)
Note: Banks' holdings are excluded.
Sources: Statistics Sweden and Sveriges Riksbank.
Although there are many drivers explaining the move from cash to
electronic payments, I would like to highlight two actions by the Riksbank. One
is a decision to "not do" and the other is decision to "do".
The first is the "not do". We decided in the early 1990s not to implicitly
subsidize cash anymore by storing it all over the country and allowing for
overnight deposits. It took some time to implement this strategy. But as of
a few years back, the Riksbank only has one cash depot in the entire
country. It is the market's responsibility to store and transport cash, hence
those costs are now borne by the market.
The second is a "do". A few years back, we engaged in a dialogue with a
consortium of banks and the Swedish clearing house on how a fast
payment system available 24/7 could be created. For a payment system to be
safe, you want to assure an eventual settlement over the central bank's
books that is in central bank money. This can normally only be done when
the central bank's payment system is open. After some thinking, we found
a way to connect the instant payment system with the Riksbank's system
and by allowing ring-fenced overnight balances for this purpose - or to put
it differently by extending a secured credit overnight - we managed to
construct a scheme where the fast payments are backed by central bank
money even when our system is closed. The result? Today over half of the
Swedish population have downloaded the fast payments app (Swish) on
their smart phone and it has become a prominent feature in the retail
payment landscape, providing a substitute for cash in person to person (P2P)
payments.
Cards and cash are the most common payment methods among
consumers
Source: Sveriges riksbank.
These two examples shows that a central bank may need to be both
"hands off" and "hands on" depending on the situation to foster
innovation. The trick is to find the right degree of intervention at the right time.
And to perform that trick there are no short cuts. A thorough analysis of
costs and benefits is needed.
Another lesson is that in the wake of such fundamental changes, like the
one currently transforming the Swedish retail payments market, new
questions keep arising.
With change, there will be winners and losers. In this case the winners are
the Swedes who have adapted to electronic payment means. Losers are
the ones who want, or for some reason need, to keep on using cash and
who increasingly find themselves in a world where access to cash, and
acceptance of cash, are on the decline. This creates a new challenge for
society. This change needs to be managed.
For a central banker, the transformation of the retail payments market also
implies a more fundamental question. If cash basically disappears, then the
general public will lose access to central bank money - they will only have
access to commercial bank money. Is that a good outcome?
Responding to this, the Riksbank has decided to analyse a "possible do".
Should we issue an electronic currency? An e-krona? We have given
ourselves about two years to come up with an initial answer to this question.
One possible outcome is that we as central bank in some sense will
ourselves become an innovator. Moreover, what we eventually decide to do is
likely to affect the possibilities and business cases for different financial
innovations in more general terms and have possible repercussions on many
other aspects of central banking, such as monetary policy and financial
stability.
To conclude, I believe that a central bank has an important role to play.
What we do, and what we do not do, will affect the pace and the substance
of innovation in the financial system. I believe this to also apply to the
regulatory community in general. We can talk about the promise of
innovation, but we also need to walk the talk - that is to make decisions that
balance innovation, stability and growth. That will by necessity involve
deciding upon a suitable degree of public and regulatory intervention. There will
be winners and losers from these decisions. Making the decisions, and
finding that balance, is a major challenge, but it is also an unavoidable
challenge.