lars nyberg : will cash replace cards? speech by mr lars nyberg, deputy governor of the sveriges riksbank, at the cards and cash payments forum, stockholm, 3 may 2011. * * * i would like to thank bjorn segendorff for his contributions to this speech. since the latter half of the 19th century, the theory of evolution has gained general acceptance. it is considered to be self - evident that better - adapted species will outcompete those that are less - well adapted. environmental changes may even lead to some species becoming extinct. there are no longer any sabre - toothed tigers or mammoths because the ice age is over. a new species may also be superior to another species in a crucial way. this is why we no longer see neanderthals walking the streets. nevertheless, some other amazingly old species are still with us. crocodiles have been around for 85 million years and the coelacanth, if i am correctly informed, can be traced back 400 million years! an evolutionary process, although of a slightly different kind, is now also taking place on the payment market. rapid technological development is changing the world around us. new payment methods are arising. bank cards and credit cards have become a natural part of our everyday lives, as has internet banking. in sweden, cheques have been outcompeted and are hardly used at all. the number of paper - based giro payments is falling rapidly and it also appears that the use of cash is declining. the value of the banknotes and coins in circulation has fallen from 9. 6 % of gdp in 1950 to 2. 9 % in 2010. so, the question is : should cash be compared with the extinct neanderthals or the surviving crocodiles? but why is this of interest to the riksbank? well, a first obvious answer is because it is the riksbank that issues banknotes and coins. another, and more complicated, answer is because one of the tasks of the riksbank is to promote a safe and efficient payment system. this may sound a little high - flown, but it means, among other things, that we should promote the development of safe and efficient payments. this is why we have a natural interest in cards and cash. hence, we are interested in the evolution of the market for payments, and that is why i am standing before you today. what i intend to talk about today is why i believe that cash will continue

produce a large number of payments than a small number of payments due to the benefits provided by economies of scale. however, it takes some time before a new system can reap these benefits. the costs for building, manning and maintaining such a technical system are rather high and it is only when the system is in place that costs begin to fall. then the cost of processing an additional payment is almost zero. the average cost of making a payment thus falls as the number of payments increases. the price per transaction that the producer can charge without running at a loss is therefore low. already established payment services that handle large volumes of payments therefore have a cost advantage. the larger the volume the established service has, the greater is its advantage. the situation for a new service is exactly the opposite. at least initially, a new service will have a small number of payments to distribute the fixed costs between. in order not to price itself out of the market, the new service will have to run at a loss until it has achieved a sufficiently high volume. a new service thus has a significant cost disadvantage compared with an established service. second, a new system has to compete against the so - called network effects. the classic example of a network effect is telephony. being the first person to have a telephone offers no advantages. if two people have telephones they can at least call each other, which has a value. for every new telephone owner that is linked to the telephone network the benefit of having a telephone to those who are already connected increases as the number of people that can be reached has now increased. this reasoning about telephony can easily be applied to payment services where everyone wants to be able to send payments to and receive payment from everyone else, for example a service for payments between private individuals ( p2p ). the reasoning becomes more complicated when we talk about payments from consumers to companies ( p2b ). payment service markets with two distinct sets of customers for payment services and payment flows in only one direction are usually called two - sided markets. the market for point - of - sale payments ( pos ) is one such two - sided market. the payments on this market go from the private customer to the company and not the other way. the card market is only attractive to merchants if there are a sufficiently large number of consumers with cards. similarly, it is only attractive for consumers to have cards if it is possible to use bis central bankers ’ speeches them in a sufficiently large number