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The promise of a cashless economy – or at least one that fully embraces digital money movement – is the dream of many an incumbent financial institution and fintech innovator alike. The collaborative nature of Swedes, combined with their general trust in state institutions as well as in one another, and a strong history of engineering innovation, has perhaps created an ideal environment for digital payments to flourish. To date, few nations have come close to the ubiquity with which Sweden has denounced cash. Here, we explore why and how this came to be the case. Which, if any, of these conditions or efforts might be replicable in other markets?
Necessity is the mother of all innovation, the saying goes, and nowhere is that more apparent than in Sweden.
A century ago, life in the Nordic country was very different. A third of its population lived in poverty, and tough winters made everyday life a struggle. Today, Sweden is among the most prosperous nations in the world, and it has emerged as a powerhouse of innovation.
How did they do it? First, one must understand Swedish culture – then everything else starts to make sense.
“It’s a collective culture. Sweden has always been quite a small country with a hard climate. And we used to be quite poor – in the 1920s, we were a really poor country,” said Professor Niklas Arvidsson of Sweden’s Royal Institute of Technology. “In the poor times, people needed to collaborate in order to survive in the tough climate.”
That spirit of collaboration has deeply embedded itself in the national psyche, and it is the bedrock of Sweden’s progress in the arena of digital payments. While many other western countries continue to lag behind, Sweden is at the forefront of a revolution that is close to making it the world’s first truly cashless society. The economy’s experiment with digital payments has been so successful that you’d be hard pressed to find a shop that still accepts physical money in Stockholm today. Cash has become obsolete, if not totally extinct.
At around 1.25% of gross domestic product, Sweden has less cash in circulation today than anywhere else in the world – ironic, when you consider that it was also the first country in Europe to introduce banknotes. In the US and Euro area, the figure stands at 8% and 10%, respectively. According to a 2020 survey by the Riksbank, the Swedish central bank, in the decade to 2020, the proportion of Swedes still opting to pay for goods and services with cash fell from around 40% to below 10%. Naturally, the pandemic accelerated this trend.
The revolution has been powered in large part by Swish, an instant payment system that was created in 2012 and now boasts around 9 million users out of a population of 10.5 million. So pervasive is the system that “to Swish” has become a widely used verb in everyday life. Swish allows customers to make instant money transfers in real time by linking their mobile phone number to their bank account. Swedes can also use it to pay in shops by scanning QR codes. They do this by opening their Swish app and pressing “Scan” on the app‘s home screen. The payment details are automatically filled in, and customers are asked to approve the transaction using Mobile BankID, a widely used electronic identification system. The funds are then transferred in real time.
Perhaps this sort of innovation is not surprising, given Sweden’s strong background and interest in engineering. “Sweden is kind of built by engineers,” Professor Arvidsson said. “There's always been a strong interest in engineering solutions. It used to be refrigerators, televisions, cars and energy solutions – everything. But then, this also has full spillover to payments. So it's always been interesting to start using electronic payment solutions with new technologies.”
The growth and adoption of Swish has led to an explosion of innovation among fintechs, with startups leveraging open banking to offer insurance services, loan refinancing and subscription management tools, among others.
However, from the perspective of fintechs, there is room for improvement. “Open banking APIs in Sweden – it’s not perfect but it’s working much better than in many other places,” one Swedish fintech founder said. “You’re going to have people in the fintech world who say Swedish banks are very difficult to work with and others who say Sweden’s very collaborative, and everyone is friends. I think it’s somewhere in between.”
Unusual for a payments system of its kind and scale, Swish was created by the country’s six biggest banks, who all proactively designed the platform. Similar national schemes in Brazil and India—PIX and UPI respectively—were led by authorities who more or less mandated banks to participate.
Yet, once again, this spirit of collaboration between Swedish banks may have been borne out of necessity. Operating in a relatively small country and eager to protect their customer base, the banks acted proactively to ward off competition from neighbouring countries. Professor Jonas Hedman of the Copenhagen Business School said:
“Danske Bank in Denmark developed this really great mobile payment app called MobilePay. The Swedish banks were a bit scared of them moving into Sweden, so they basically created their own company that made something similar just to block Danske Bank”
While banks powered the transition, Swish caught on quickly, largely because ordinary Swedes were so receptive to it. Public sentiment started shifting away from cash in the noughties, when the country was plagued by a number of high-profile bank robberies. The most memorable occurred in 2009, when masked gunmen jumped from a helicopter onto the roof of a G4S depot in Västberga. It wasn’t the first, and it wouldn’t be the last.
Both workers’ unions and businesses were eager to minimise the risks and costs associated with handling cash, as were banks. With the advent of Swish, many merchants started to go completely cashless, and cash usage plummeted. In 2011, there were a total of 43 bank robberies in Sweden. Last year, for the first time in decades, there were none.
The legal environment helped. Unlike in Denmark, there is no law in Sweden that requires businesses to accept cash as a payment method, even though it is legal tender. This goes some way towards explaining why cashlessness is more prevalent in Sweden than in other countries – as does their unique approach to contract law. As Professor Hedman said:
“Contract law allows us to enter agreements with people, and our banking law or central banking law is of less precedence compared to contract law. So when you enter a store, and they have a sign saying: ‘we do not accept cash,’ you have entered an agreement with that store that they do not accept cash,”
Increasingly, these signs are popping up metaphorically as well. Professor Hedman predicted back in 2017 that, as of 24 March 2023, it would stop making sense for Swedish merchants to continue accepting cash payments – heralding the dawn of a cashless society. “We found that it becomes more costly to manage cash than the marginal profit on cash sales when cash transactions fall below seven percent of the total payment transactions,” he said.
The accommodating legal system also extends to children, who are able to own their own debit cards from the age of seven and are growing up in a society where they may have no experience of physical money at all. Digital payments have become so ubiquitous that the former governor of Sweden’s central bank said recently: “[Young people] have no idea” what real money looks like anymore. It may sound like an exaggeration, but this is a country where even children use digital piggy banks to manage their pocket money on mobile phones.
By “real money”, Stefan Ingves was of course talking about coins and paper, but central banks are now being forced to do some soul searching about what “real money” actually is.
Declining cash use and rising competition from alternative currencies has prompted the Riksbank, like many other central banks across the world, to start exploring a central bank digital currency, known in Sweden as the E-krona. The task ahead is huge, and central banks are still not clear on the purpose these currencies might serve, but there is a belief that a national digital currency, and a resilient system underlying it, could improve financial stability, particularly in times of crisis. It could also help with the transmission of monetary policy.
Not everyone is convinced, however. “Sometimes I wonder whether this is a solution looking for a problem…It’s not clear to me exactly what problem is being solved,” one Swedish fintech founder said. “[Central bankers are thinking] that from a society resilience point of view, if there is a war and a bank goes down, we need something that we know works. That has of course become a hot topic over the past year. But I think the real driver is that people got scared about Facebook possibly issuing its own currency. However, one way of dealing with that would be to regulate it.”
Over the past decade, the transition away from cash has seemed inexorable, but the Swedish government has no plans to abolish it, despite central bankers pouring their energies into digital currencies. A recent parliamentary review emphasised the need to keep cash, and, in 2019, the Swedish Civil Contingencies Agency, an arm of the government, told Swedes to keep some “cash in small denominations” in case of emergencies, such as cyber attacks or war.
“It's difficult to see a point in time where cash is completely eliminated because, really, it’s a political decision,” said Professor Arvidsson. “The market is pointing in that direction. Young people never start using cash, and older people are the main users of cash, so when demographic structures evolve they will disappear. So we will see a continued reduction of the use of cash, but if it's completely out of the system, that's really a political decision. There are no signs that the Riksbank will not have the task of issuing cash. So probably it will stick around for a long time, but [will be] used less and less often.”
The extent to which cash eventually disappears is also, of course, a question of trust. “Sweden is a high trust society,” Professor Arvidsson continued. “It's been a society where you can trust the other party – whether the supplier, the customer or your neighbour. And I think that has meant we don't need cash in our hands to believe that we have the value that this model represents. We trust that there's no problem.”
This trust is predicated on the fact that the banking system has been relatively stable compared with that of other markets. Combined with Swedes’ collaborative nature and penchant for engineering innovation, it has paved the way for such a large-scale transition as the move to a true digital economy.
An aggregate of stories told by business and fintech experts and builders globally, Flow was created to explore questions around how money moves today, who is leading the charge to make it better and where further innovation is needed.
Flow is created, edited and managed by the team at Stitch, a global payments service provider dedicated to building next-gen financial infrastructure that can power better money movement for enterprises around the world.