World Economy

People in Sweden barely use cash — and that’s sounding alarm bells for the country's central bank

Swedish krona notes and coins sit in a cashier's till.
Linus Hook | Bloomberg via Getty Images

Of all the countries in the world to go completely cashless, Sweden could be the first.

It's already considered to be the most cashless society in the world. More Swedes have access to a payment card than to cash, according to data from the country's central bank, the Riksbank. And the overwhelming majority of the nation — 85 percent — have access to online banking.

The Scandinavian country has seen the circulation of notes and coins as a percentage of gross domestic product (GDP) drop year after year, as Swedes make less withdrawals and look to digital methods of paying for things, like cards and mobile.

Just 2 percent of the total value of transactions in Sweden consist of cash, and this is expected to decline to less than half a percent by 2020, according to research by Capgemini and BNP Paribas.

The situation has gotten to a stage where the central bank has had to warn on the rapid rate at which physical cash is being phased out of Swedes' lives.

Earlier this year, Riksbank Governor Stefan Ingves said that a completely cashless society would mean a small number of commercial players being responsible for all payments in Sweden, posing a threat to the infrastructure for payments. A cashless Sweden could be unprepared if faced with a crisis, he added.

Demand for cash would likely increase in a crisis situation, the Riksbank said, but with less notes and coins in circulation, supply would be restrained.

Another problem is that some people in Sweden have little to no access to digital payment services — and some don't want to go digital.

"Our own starting point really is that we provide notes and coins to the society to the extent that society wants to use our version of money versus other versions of money as long as it is safe and efficient," Cecilia Skingsley, deputy governor of Riksbank, told CNBC in a phone interview.

"But we have noticed this rapid development, we have noticed that there are a number of people and there a number of situations and their geographies where cash is absolutely vital."

Elderly people and refugees are among those that would need access to physical cash even if the overwhelming majority of the country don't, Skingsley said.

Sweden could eventually "reach a situation where legal tender is no longer an efficient medium of exchange for commercial transactions and that it is a situation that no other country has been in before," Skingsley said.

A world without cash: Could it happen?
A world without cash: Could it happen?

A cross-party parliamentary committee in Stockholm is currently reviewing central bank legislation to examine whether banks should be forced to provide cash services for their customers. Increasingly bank branches are refusing to offer over the counter cash services, due to weakening demand.

Why are Swedes barely using cash?

Sweden is a unique economy when it comes to payments. It's home to a popular instant payment app called Swish, set up in 2012 by seven of the largest banks in the country. More than half of Swedish consumers are signed up to the app.

It's also got a booming tech scene, with homegrown giants like Spotify and Microsoft-owned Skype, as well as fintech start-ups like iZettle and Klarna.

But another reason for the fall in physical cash is the fact that retailers don't have to offer it.

"It's a bit of an anomaly in the Swedish legal system because if you look at the Riksbank Act it says pretty straightforward that the Swedish krona is legal tender and it should be compulsory to accept that for settling transactions," Riksbank's Skingsley said.

"But there are other parts in legislation that creates exemptions. Given that the technology has moved to the extent that it's moved, it is perfectly possible to live in Stockholm for example without ever using cash."

To address the rapid direction toward cashlessness, one option being tabled by the central bank is a government-backed virtual currency called the ekrona. Not much is known about the technical details of this digital currency yet. The project is currently in the second year of a two year pre-study.

"As technology jumps forward and people are changing preferences we have to think long and hard about what the public sector offers to people when it comes to money and how do we facilitate people living in society getting access to money in the forms and shapes they prefer them to be," Skingsley said.

The central bank is not keen on the idea of cryptocurrencies however. "Cryptocurrencies are so far very poor versions of money," Skingsley said. She said that the likes of bitcoin and ethereum are not a stable store of value or an efficient means of exchange.

How to build a cashless society? Give people no other choice
How to build a cashless society? Give people no other choice

Many shops, restaurants and bank branches refuse to handle cash because of how little consumers use it, with retailers putting up signs to say they don't accept cash payments all over the country. Just 20 percent of payments in shops are made in cash, according to Riksbank, a figure that pales in comparison to other countries. In the U.K. for instance, cash payments account for 42 percent of retail transactions, according to the British Retail Consortium.

Jacob de Geer, CEO of iZettle, supported the idea of a government-backed digital form of currency.

"I think it's a really compelling idea that government-controlled banks could issue electronic cash," he said. "I think it's very progressive and it's smart to go about it that way to be able to control the monetary flows."

De Geer said his business — which provides mobile card readers and other digital payment products to small businesses — was benefiting from the trend. "It's part of our raison d'etre," he said.

But cash is still relevant in many people's lives, the entrepreneur said, adding: "I think there still will be a role for physical cash in societies."

Will Sweden be the first to go cashless?

Sweden certainly seems to be in the lead when it comes to cashlessness, but a number of other countries are seeing similar trends.

Neighboring countries Norway and Denmark are thought to be close behind, and the U.K. is seeing its own shift towards digital payments. In Britain, a wave of digital banks are emerging that offer just an app and a contactless debit card.

Whether Sweden becomes the first to become cashless depends on the likelihood of the country's legislature tightening central bank legislation to create protections for cash, the Riksbank's Skingsley said.

"We are a candidate (for cashlessness) for sure but nobody knows what the future holds. We should as a central bank be prepared to be able to fulfil our objective to facilitate a payment system for people and that should work also in a digital society."