Lessons from the North: How Sweden is going cashless in 2023

March 2023 may well be a milestone in the history of Sweden. 

The Nordic country is expected to become the world's first cashless economy by then – March 24 to be exact.

This is not a mere prediction. This is the conclusion of a 2017 research done by two professors – one Swedish and the other Danish – in collaboration with the adviser and researcher at the central bank of Sweden.

They found several reasons why this will happen. One of the reasons is unique to Sweden – a law that enables merchants to make customers pay electronically despite the status of cash as a legal tender.   

The news has already caused a stir around the world, with experts in many countries analysing how Sweden is going to do it and what the possible implications will be. 

The North European country – widely known for its innovation, high quality of life and welfare economy – is already regarded as a poster child for the cashless movement.   

What it means to become cashless

If a country goes cashless, it does not only mean its citizens will stop using cash. It means cash will no longer be a generally accepted means of payment there. 

At least, that is what is going to happen in Sweden.  

In other words, you cannot use cash to make a purchase in Sweden once it becomes a cashless economy. 

However, it is not like paper money will be nullified in Sweden. It is just that those bills will not be accepted during transactions. People will have to make payments electronically.  

"There might still be banknotes and coins left, but you will not be able to use them in the practical sense," explains Jonas Hedman, associate professor of the department of digitalisation at the Copenhagen Business School. 

Hedman is one of the three members of the team that conducted the research. The other members are Niklas Arvidsson, professor at the KTH Royal Institute of Technology in Sweden, and Björn Segendorf, adviser and researcher at Sweden's Central Bank Sveriges Riksbank.

The cash management costs of 750 Swedish retailers and the decline of cash in circulation in Sweden were studied for the research.   

"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," Hedman told Knowledge@Wharton, the online business analysis journal of the Wharton School of the University of Pennsylvania. 

"When this happens, an economically rational retail management should stop accepting cash," he added. 

Cash is declining in Sweden, fast

Indeed, what Hedman said is already happening in Sweden.

About 80 percent of Swedes now use cards. 58 percent of payments are card payments in the country in contrast to a mere six percent cash payments, according to data from the Swedish central bank.

Moreover, electronic payments are increasing rapidly in Sweden. More and more shops and restaurants in the country are no longer accepting cash payments. They ask customers to pay either by cards or mobile app. 
The use of mobile payment services is high for person to person payment too, further reducing the need for having cash.     

Sweden has reached the tipping point of cash usage. Many Swedes no longer carry cash because of the ubiquity of electronic payment facilities in their country. Even Swedish children make payments with cards.

The Swedish central bank data show 39 percent of Swedes paid for their most recent purchase in cash in 2010. It plummeted to 13 percent in 2018.

On the other hand, Swedes have doubled their card use during the 2010s.

Moreover, a big majority of Swedish banks have stopped allowing customers to withdraw or pay in cash over the counter. This is because cash is extremely expensive to manage for an individual branch due to the security system — such as the vaults and other required measures. 

If someone wants to deposit or withdraw cash, he needs to go to ATM machines, not the banks.  

In 2007, the country had roughly 100 billion cash currency in circulation. After a decade, it stood at around 45 billion – a decrease of about 50 percent. 

Swedes trust cash but they do not use it. For them, mobile payment and card payment are way more convenient than using banknotes. 

Furthermore, the whole Swedish population is under mobile coverage and the nation is very open to adopting modern technologies as well as accepting changes in the payment systems.

Part of a larger story

The growing use of electronic payments and the dwindling use of cash, however, do not tell the whole Swedish story. Like Sweden, cashless payments are evidently increasing in many countries, including the developing ones.

For example, digital transactions in India increased by 55 percent in 2018, compared with 48 percent in China and 23 percent in Indonesia, according to data from the Bank for International Settlements – a Switzerland-based global financial institution comprising central banks of 60 countries.  

The Bangladesh Bank introduced Mobile Financial Services (MFS) back in 2011 which has been witnessing extensive growth. According to the central bank data, in January 2018, merchant payment through MFS was Tk143.9 crore and it rose to Tk404.85 crore a year later – a 181.34 percent increase.

Nevertheless, a specific legal framework in Sweden is keeping the country ahead of others in the race to become a truly cashless society. 

Higher precedence of contract law

Explaining the legal framework, Professor Hedman said contract laws have a higher precedence than banking and payment laws in Sweden.

The Swedish central bank law (Riksbankslagen) says cash is a legal tender and should be accepted by those receiving payments from customers. However, the contract law (Avtalsrätten) states that two parties – a merchant and a consumer; or a bank and a consumer – can enter an agreement where the central bank law can be set aside.

This means if a store in Sweden puts up a sign that it does not accept cash payments, its customers are assumed to have entered a contract or an agreement that they cannot pay with cash. They have to use cards or mobile app to pay.

Hedman said the situation is the opposite in other countries because payments laws there have a higher precedence than contract laws. 

This is the reason why businesses in those countries cannot compel customers to make payments electronically as long as cash remains a legal tender.

"In those countries, in Denmark for example, if something is a legal tender, a store must accept it according to the law," the Danish professor pointed out.

Legal framework of payment: Bangladesh vs Sweden

Like Denmark, businesses in Bangladesh cannot override the central bank's law. That is the case in neighbouring India too.

Md Mezbaul Haque, general manager of the payment systems department at the Bangladesh Bank, told The Business Standard there is no law in Bangladesh under which a merchant can force a customer to pay electronically. 

"Neither can the merchant refuse to accept cash. Cash is a legal tender here and consumers can use it to pay for their purchases," he said.

The central bank official explained that a merchant in Bangladesh declining to accept cash payments would actually "deprive" the customer of a right – the right to use a legal tender for making payments. 

"The trader just cannot do that. What he can do at best is he can encourage the customer to make electronic payments. He can explain the benefits of cashless transactions. That is the furthest he can go," Mezbaul added. 

Going cashless: The ultimate destination for all?

When asked whether Sweden becoming cashless would be good or bad for the country, Hedman refused to give a direct yes-no answer. 

Instead, he said becoming cashless is the path that not only Sweden but other countries are on too.

"It is inevitable. It is something we cannot stop," the researcher noted. 

In light of that, Hedman believes every country should have a commission that will take a holistic approach to study the implications of going cashless. Such an approach will see the involvement of economists, anthropologists, historians, psychologists and others in the whole process.

"Every country is different and the issues are very country-specific. So, this needs to be done at a country level," he added.

Countries contemplating winning the race to become cashless should focus on strategies and policies that are tailor-made for them – that is the ultimate lesson from the Swedish case of going cashless.