The cashless economy: Sweden's switch to digital tells a cautionary tale

Bjorn Ulvaeus, one-quarter of Swedish pop group ABBA, became a standard-bearer for a world without cash after his son got burgled. Ditching coins and banknotes would hurt criminals and tax-dodgers while helping businesses and government budgets, he reckoned. “Sweden would be the ideal country to make cashless,” he told Bloomberg in 2014. “I think that should be the future.”
 

Nearly a decade later, he’s almost got his wish. A minority of Swedes said in a survey they’d used cash in the previous 30 days, while a whopping 95% of 15- to 65-year-olds has downloaded mobile payment app Swish, owned by lenders including Danske Bank A/S and Swedbank AB. Phone tapping and card swiping dominate shopping, donations for the homeless and church collections. Cash transactions declined to 8% of business payments at the end of 2022 from 18% five years earlier, estimates Jonas Hedman of the Copenhagen Business School. With such low volumes, it’s effectively unprofitable to handle cash. 

Sweden’s an extreme case: It’s a small, tech-savvy economy. But the direction of travel is the same everywhere, accelerated by a pandemic that saw QR codes replace restaurant menus and spending online rise — even in Sweden, where lockdowns were less strict. Given central banks everywhere are mulling their own digital currencies to offset the risks of cashlessness, there are lessons for us all.

ABBA’s Ulvaeus got a few things right. Cash-related crimes like robbery are down, as is tax evasion. Black-market activity has also shrunk. Just as Sweden brought more under-the-counter cash into the regulated economy by offering tax breaks, pandemic-era benefits doled out by governments appear to have had the same effect. It may be one reason why Europe is seeing a jobs boom despite flatlining growth.

Consumers and businesses also seem to like the new state of affairs — especially those startups taking a cut. It’s become easier to spend more, maybe too much as Gen-Z shoppers fall prey to buy-now-pay-later loans. Still, to the relief of regulators, volatile cryptocurrencies have completely failed to catch on in Sweden — thus far.

Risks have emerged, though. One is digital exclusion. Homeless people may accept cards, but pensioners and refugees can be shut out by a cashless world. This goes hand-in-hand with the “computer says no” problem. When today’s digital payments systems fail, they really fail — as Swish users discovered last year when the entire network went down. On a recent trip to Brussels, I visited a bar that took pride in its contactless, cashless system requiring customers to order drinks on their smartphones. But when a tech glitch hit, there was no fallback.

Vulnerability is another issue. We might feel safer with fewer banknotes in our pockets late at night, but crime has also gone digital and conjured up new types of fraud. Transaction data is increasingly in the hands of Big Tech conglomerates like Meta Platforms Inc, which spooked global regulators when it tried to launch its own currency. And in a world where hackers are sponsored by governments and cyberattacks can strike critical infrastructure, payments are a geopolitical risk. “If Putin invades Gotland (Sweden’s largest island), it will be enough for him to turn off the payments system,” warned one pro-cash campaigner in 2018.

One answer may be to fight to protect cash rather than replace it, as powerfully argued in Cloud Money by author Brett Scott. But this is no panacea: Our march towards cashless payments isn’t going to suddenly stop. Private companies want it too much, and consumers can’t do much about it — “convenience is something that is damn hard to legislate against,” says Copenhagen Business School’s Hedman.

Even if we could stop it, should we? Digital colonization by a foreign actor’s payment offering, or by another crypto-related attempt at disruption such as stablecoins or DeFi, would be a bad outcome. The Bank of England warns we live in a world of potentially instantaneous bank runs.

Hence why one potential answer is a central bank issued digital currency. Such a move shouldn’t be undertaken lightly: It could increase traceability and complexity, and create new risks if it competes with commercial banks, as my colleague Marcus Ashworth argues.

But to say it shouldn’t be undertaken at all is too extreme. A no-frills “narrow” account at the central bank could be a good fallback when the next crypto-style crisis in privately issued money hits, as could instant payments of benefits. This goes hand-in-hand with more resilient infrastructure: Joachim Samuelsson of Swedish tech firm Crunchfish AB says he’s designing digital money with more cash-like properties, such as offline functionality. A regulated, cross-border, cross-currency coin could deliver faster transactions, according to Deutsche Bank AG strategist Marion Laboure.

The biggest lesson from Sweden is not to let any of this happen without a debate. Central bankers need buy-in from politicians and the public, amid the biggest inflation challenge in years. ABBA in the 1970s sang of funny money; nobody’s laughing now.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper