Killing Cash

According to researchers from Stockholm’s KTH Royal Institute of Technology, Sweden is on track to becoming the world's first cashless society. To test that statement, I have been looking at some figures from the Swedish National Bank.

The statistics show that it has been a steady growth of non-cash transactions, since web-based payments were introduced in the first half of the last decade and today 92% of all transactions are digital.

The payment instrument behind the major part of the growth has been the debit card, which has nearly tripled in use since 2005.

I believe the use of debits cards was initially boosted by the growth in web-based payments, but over the last five years it has increasingly been used to replace cash for in-store purchases. Reason is that when the payment terminals got broadband connectivity some years ago, the shortened response time actually enabled you to use the debit card to pay directly from your bank account without causing uproar in the impatient line of shoppers piling up behind you. This view can be confirmed by looking at how much cash has been in circulation in the Swedish society over the last ten years.

The amount of notes and coins was on a steady level until five years ago when it started to drop significantly, pretty much at the point in time I remember that my own visits to the ATMs became much less frequent. For me, using cash was simple and fast, but the downside was that I needed to pre-fill my wallet from ATMs, which weren't necessarily located where I was. To stop using cash, I wanted an alternative that was not only simple and fast but also added value by taking away the burden of having an extra pocket of money outside of my transaction account. And that was exactly what the debit card did for me and a lot of other Swedes five years ago. Lesson learned: If you want to introduce a new payment mean, it doesn't only have to be as good as the old one, it also needs to add some extra value!

I've been thinking about the reason why the transition into the cashless society seems to go faster in Sweden than elsewhere. According to the researchers there is a lot of uniquely Swedish stuff that has been driving the evolution, but I think you just have to pay a visit to one of the neighbouring countries to realise that is has to be a more generic explanation. Things are happening in a similar manner throughout the Nordics and I believe the common denominator is that the people that live in these countries are early adopters of new digital solutions.

Even though online shopping is growing, it is still so that the major part of retail sales is conducted in-store and that makes it interesting to look at what new means of payment the early adopters in Sweden have taken a liking in to replace the use of cash? We have already seen in the National Bank statistics that the debit card has outperformed all other payment instruments up until 2014, but we also know that there has been much talk lately about an increased use of mobile phones to make in-store payments. Some of that will anyway show up as card transactions, since the payment can be executed through the card processing infrastructure, even if the user has ditched the plastic card in favour of the smartphone.

At The Future of Nordic Banking conference in Stockholm in the beginning of November, I came into a discussion around the use of mobile phones for in-store purchases. One person claimed that Apple Pay (and its likes) is the game changer that will move the market towards new digital devices in replacement of cash and plastic cards. I, on the other hand, claimed that Apple Pay is five years too late. Back then it could have competed with the debit card to replace cash. Now, when the debit card is already established, Apple Pay needs to be not only as easy and fast to use as the debit card, but it also has to provide some added value that can be recognized by the major part of the consumers to get them to change habit.

I don't believe that minor changes in how you behave at the payment terminal will create the next turn point that makes plastic cards and cash finally go out of business. There must be something that is fundamentally better with the solution that takes over and when looking at what is currently happening among the early adopters in Sweden, I think I get an idea of what that might be.

We have already concluded that the debit card from a usability point of view is close to cash, when making in-store purchases, but there is one feature of cash that hasn't really been matched by the plastic card and that is the direct money transfer between two persons. In cases when you for example need to split a bar tab or let your kid buy some candy, you want to hand the money over immediately and there cash has been the obvious choice, especially if sender and receiver haven't had accounts in the same bank or been connected to the same e-wallet system.

But now something is visibly happening in the Swedish market. In 2013, the Swedish banks launched Swish, a new real-time system for peer-to-peer transfers between bank accounts. Even though the figures so far are much lower than those of cards, it is a striking increase in volumes over the last months.

Swish allows you to send money to friends, companies and organizations using your mobile phone. You send money to the recipient’s phone number and it goes directly into the connected bank account, no matter which one of the participant banks the recipient has. The payment is authorized using a soft token solution on the phone.

My favourite Swish scenario is that my son is standing at the counter in a shop to pay for some new computer stuff and behind him is a long queue of other teenagers. When realising that he is out of money, he phones me and I make a Swish transfer topping up his account in less than two seconds. Swish is so fast that it definitely gets a character similar to cash.

The real-time infrastructure Swish is based on is primarily used for peer-to-peer money transfers, but when we now see how fast the adoption rate is picking up I strongly believe that a lot of new solutions based on the same infrastructure will come to the market.

Bank agnostic real-time payments are what I believe to be the future. Finally, we have something that can make mobile payments not only as good as cash and plastic cards, but also provide a significantly higher value!