A surge in the use of debit cards and
widespread adoption of online banking has enabled Sweden to make
impressive progress in eliminating paper-based payments in recent
years. However, for the country’s central bank, reducing the use of
cash for out-of-pocket spending remains the big challenge.

Migrating society from cash
to electronic payments has long been a key focus of central banks,
but few have devoted as much time and effort analysing the social
dynamics at work as Sweden’s central bank, the Sveriges
Riksbank.

A key motivation for the Riksbank’s research is Sweden’s still
high use of cash, at least when compared with other Nordic
countries. This was a focal point of a speech delivered by the
Riksbank’s deputy governor Lars Nyberg at Sweden’s Finansförbund’s
(Financial Sector Union) 2008 congress held in Stockholm.

“We Swedes like our cash more than most analysts believed a few
years ago,” Nyberg told the conference. “Cash is still used to a
greater extent in Sweden than in other Nordic country.”

He stressed that this does not mean electronic payments are not
eroding the use of cash. An indicator of this is the share of
bank-notes and coins in circulation which since the 1950s has
fallen from about 10 percent of GDP to about 3.5 percent of
GDP.

However, Nyberg noted that over the past 15 years the rate of
decline in the use of cash has slowed, though he added there are
good indications the use of cash is still falling.

A key indicator is cash withdrawals from ATMs. According to the
European Central Bank (ECB), between 2000 and 2006 withdrawals
hovered between SEK270 ($32 billion) and SEK280 billion annually
before falling sharply in 2007 to SEK249 billion, 10.4 percent
lower compared with 2006.

The number of ATMs has also levelled off, increasing from 2,800
in 2005 to 2,809 in 2007. This represented 307 ATMs per million
people, up from 295 per million in 2000, and was well below the
European Union (EU) average of 806 ATMs per million people in
2007.

Contrasting with this the number of POS terminals has grown
significantly, increasing from 87,133 in 2000 to 187,332 in 2007.
This represented an increase of from 9,821 POS terminals per
million people in 2000 to 20,478 per million in 2007. This growth
took Sweden from below to well above the EU average which between
2000 and 2007 increased from 11,570 POS terminals per million
people to 15,357 per million people.

In terms of the number of POS terminals per capita the Nordic
countries are now very close to one another, noted Nyberg.

The increase in POS terminals has been paralleled by a
substantial increase in the use of payment cards in Sweden, with
the total number of cards rising from 8.38 million in 2000 to 15.08
million in 2007, or 1.67 cards per million people. Card transaction
volume has also grown significantly, rising at a CAGR of 16.8
percent between 2000 and 2007 from SEK210.7 billion to SEK623.8
billion.

Card transactions in Sweden overtook ATM cash withdrawals in
2002 and now out-number them by almost four to one. Specifically,
the number of cards transactions increased from 256 million in 2000
to 1.12 billion in 2007, or an average of 124 transactions per
capita, a level on par with Denmark and Finland but only about 60
percent of that recorded in Norway.

Indicating a growing use of cards in place of cash for smaller
transactions, the average value per card transaction fell from
SEK823 in 2000 to SEK556 in 2007.

“Cards appear to act as a substitute to cash,” observed Nyberg.
“This is particularly so in the case of younger people.”

The debit card dominates in Sweden and in 2007 accounted for 60
percent of total cards in issue and 64 percent of total card
payments. Credit cards accounted for 22 percent of total cards in
issue but a mere 1.5 percent of the total value of card payments.
Notably, credit card transactions peaked at SEK23.1 billion in 2003
before falling to a low of SEK77.54 billion in 2005 and then
recovering to SEK9.15 billion in 2007. The balance of cards and
card payments in 2007 was accounted for by delayed debit cards.

Giro system adapts

An area of Sweden’s payments system that has seen considerable
change as a result of the swing to card payments is the giro system
which comprises Bankgirocentralen (BGC) and PlusGirot.

BGC, a service established by banks to facilitate credit
transfers between bank accounts, primarily handles retail payments.
The six banks that own BGC account for about 80 percent of payments
activity in Sweden. A further 13 of the 126 banks registered in
Sweden are BGC members.

PlusGirot, founded in 1925 as Postgirot by the Swedish postal
service, is now owned by Swedish bank Nordea. Postgirot, which
since 2002 has been a member of BGC, handles low-value retail
payments and large-value payments.

“Over the past few years more card payments have been made than
giro transfers, other credit transfers and direct debit,” Nyberg
told conference attendees.

Indicatively, ECB data shows the number of credit transfers fell
from 65.4 percent of total non-cash payments in 2000 to 29.4
percent in 2007. In value terms direct credits have largely held
their own, falling marginally from 94.8 percent of the value of all
non-cash payments in 2000 to 90 percent in 2007.

However, the medium through which direct credits are transacted
is undergoing significant change as a result of the advent of
internet banking.

“In some banks more than half of the credit transfers are now
internet-based and this percentage is increasing rapidly,” noted
Nyberg.

This trend reflects a very high usage of internet banking in
Sweden. According to the country’s statistics bureau Statistiska
Centralbyrån (SCB) two-thirds of all Swedes aged between 16 and 74
used an internet bank during the first quarter of 2008. This
finding is similar to results of a 2007 study by Deutsche Bank
which found some 60 percent of all Swedish adults banked online.
This ranked Sweden fourth in Europe behind the Netherlands, Finland
and Iceland.

Internet a big change driver

A major driver of internet banking growth is Sweden’s
enthusiastic adoption of the internet and, latterly, broadband
connections. According to the SCB, 78 percent of Sweden’s adult
population had broadband in their homes in late-2008, up from 44
percent in 2005.

High internet usage has also prompted Swedes to become avid
online shoppers. This was highlighted in a study by the SCB which
revealed that between April 2007 and March 2008 over half of all
adults had shopped online.

BGC has adapted its services to the internet and reported that
in 2007 its largest outgoing payment products were payments via the
internet (including card payments), direct debits and supplier
payments. Its largest receivable products were OCR Payments, a
service for all companies and authorities which deal with payments
received, direct debits and payment statements via the
internet.

BGC reported that, in 2007, the proportion of paper transactions
in relation to the total number of transactions that it processed
fell by 21 percent. Of the two remaining paper-based products
electronic alternatives will become available in 2009.

In 2007, BGC recorded 698 million transactions worth SEK6.69
trillion, the latter an increase of 14.2 percent compared with 2006
and equal to 60 percent of all transactions in Sweden. BGC has
650,000 active business customers, or about 70 percent of Swedish
companies.

But while BGC’s numbers are substantial, in the context of
European automated clearing houses (ACH) it is comparatively small.
This prompted BGC to go the outsourcing route and in a European
first announced in October 2007 that UK transaction processor
VocaLink had been selected to assume responsibility for all its
processing services.

BGC took a rational decision to retain ownership of the ACH and
identify a partner that could offer guaranteed lower transaction
costs and development of new services, such as those for the Single
Euro Payments Area, VocaLink Europe managing director Paul Taylor
told EPI in a recent interview.

Transition of BGC’s processing to VocaLink began in May 2008
with completion anticipated in the beginning of 2010.

Cash has its place

Overall Sweden has been highly successful in eliminating
paper-based transactions. Between 2000 and 2007 ECB data reflect a
38 percent fall in the number paper of paper-based transactions
from 154 million to 95 million, or 10.3 per capita.

The value of paper-based transactions fell by a far more
significant 74 percent to SEK346 billion. In the process
paper-based instruments declined from 14.2 percent of all
transactions by value in 2000 to 3.1 percent in 2007.

Little of the decline in paper-based payments can be attributed
to lower use of cheques which have long played a minor part of
Sweden’s payments market. Indeed, in value terms cheques increased
marginally as a proportion of total payments between 2000 and 2007,
from 0.2 percent to 0.5 percent. The number of cheques written,
however, fell from 0.225 per million inhabitants in 2000 to 0.109
in 2007.

Given this seeming enthusiasm for progress Nyberg posed the
rhetorical question to congress attendees: “Why do we use more cash
in Sweden?”

Conceding that there is no single answer, he added that
experience in Sweden and Norway has shown that demand for payment
services is price-sensitive.

“In Norway, electronic payments, including card payments,
increased very rapidly after the banks changed their pricing
towards charges based to a greater extent on actual costs,” Nyberg
said. “For instance, they began by making a small charge for ATM
withdrawals.

“It is possible that our pricing of card and cash payments
respectively – the price the consumers see – lies behind the fact
that we use more cash?” he added.

The impact of pricing for cost was evident in the virtual demise
of the cheque in Sweden, Nyberg continued. Once a major factor in
Sweden’s payments system, cheques accounted for 70 percent of
non-cash transactions in 1990, he noted.

He explained that cheque handling became increasingly
unprofitable for banks but none of them dared take the initiative
to debit customers for these costs for fear of provoking a consumer
backlash.

However, when, at the beginning of the 1990s, one bank began
charging a fee of SEK15 per cheque and other banks followed suit,
the majority of cheque payments disappeared over a few years
without “political convulsions”, explained Nyberg.

“The reason for this was that there were excellent substitutes
that were free of charge and which were marketed by the banks,
primarily cards and credit transfers,” he added.

Nyberg believes that growing use of cards will further erode the
use of cash in Sweden. However, he stressed that the “cashless
society is as far away as the paperless society was when one once
began to speak of it”.

He continued that, although cash transactions will continue to
decline as a proportion of total payments, there will always be a
need for bank notes and coins.

“Cash is an efficient form of legal tender for certain purposes
and will continue to be so,” he stressed.

Based on research conducted by Riksbank it is more cost
efficient to use cash instead of cards for transactions of up to
SEK70. Above this, card payments are always preferable, said
Nyberg.

He added that this conclusion was based on 2002 data and
indicators suggest the cut-off point is now below SEK70.

Research conducted by Riksbank in late-2006 revealed the average
consumer chose to pay by card when the amount exceeded SEK123.
However, the cut-off point between cash and card payments depends
heavily on the age of the consumer.

“A 60-year-old consumer will only choose a card over cash when
making a purchase of, on average, SEK179, while a 20-year-old
consumer would choose to pay by card for a transaction as low as
SEK60,” said Nyberg.”

“Perhaps payment behaviour will become more socioeconomically
efficient in future generations,” he concluded.