Anticipating a cashless society

A version of this article first appeared in BAI’s May Executive Report: Unlock what’s next for digital. You’ll find insightful coverage in the issue on seamless consumer touchpoints, AI-powered loans, layered identity verification and more.

The cashless society has yet to fully arrive, but Sweden and its 10.6 million residents may be as close as it gets to becoming the world’s first cashless society.

Most of the Scandinavian country’s bank branches no longer handle cash. Most retailers and restaurants only accept mobile or contactless card payments. Per a survey by the Riksbank, Sweden’s central bank, only 8% of Swedes used cash for purchases in 2022 versus 40% in 2010.

Jonas Hedman studies the inevitability of cashless societies. He is a professor of digitalization at the Copenhagen Business School in Denmark, across the Oresund Strait from his home in Malmo, Sweden. In addition to the cashless society, Hedman explores how digitalization transforms businesses and society with a particular focus on the fintech sector. His research has covered blockchain-based payments systems and open API in financial services.

Hedman says the central banks of Sweden and Denmark are contemplating issuing a digital currency. The Federal Reserve, too, has done its own early research on U.S. feasibility of this approach.

Hedman, who attended a year of high school in New Jersey as an exchange student, has been a frequent visitor and speaker in the U.S. From his home in Malmo, Hedman spoke via Zoom to BAI contributing writer Edmund Lawler.

The interview has been edited for length.

BAI: What do you mean by a cashless society?

Jonas Hedman: I define it as a society in which cash is not generally accepted. You cannot use it in your everyday life. Stores stop accepting cash for whatever reason. It is extremely limited, and the only places where you can use it for sure use are larger grocery stores, our state-owned monopoly of liquor stores (Systembolaget) and pharmacies. More than 95% of stores do not accept cash. Most smaller merchants try to avoid it.

How does the use of cash in Sweden compare to the U.S.?

The United States is a big country. You can manage your way around the States with cash – at least that’s been my experience. In Sweden, however, cash is an obstacle. You can’t use it. There are very few banks that accept cash deposits. You can’t buy your bus or train tickets with cash. You can’t pay your cab fare in cash. It is at another level than the United States.

Other Scandinavian countries, especially Denmark, are close to becoming like Sweden. But in Denmark, there is a law mandating that stores accept cash. We do not have that in Sweden, which allows the merchant to put up a sign: ‘We do not accept cash.’

What are the advantages of a cashless society?

On a macro level, a cashless society is more productive than a cash-intensive society because the transaction costs are lower. On the merchant side, there are lower costs and more efficiency in the management of payments. The biggest cost for a merchant is probably counting the amount of cash in the register, particularly if there is an error. Then they must recount the money, and that takes a huge amount of time. On the payer’s side, it’s just more convenient. And from an environmental aspect, cash produces huge amounts of CO2 in its production and transportation.

On another level, a cashless society makes it slightly more cumbersome for criminals to wash their money or at least conduct transactions. Also, bank robberies will go away. There was only one bank robbery last year in Sweden, and they didn’t get any money. Historically, bank robberies were extremely popular in Sweden, as well as robberies of armored cars.

What are the disadvantages of a cashless society?

There are some drawbacks to a cashless society. In Sweden, Denmark and I assume Norway as well, there are people on the other side of the digital divide. If cash vanishes, there will be groups such as the aged or [others without access] who may have difficulty making electronic payments, which require the digital multifactor verification process. We had a lot of refugees from Ukraine two years ago. They don’t have a national digital ID. They are too excluded and can’t pay for things. They can’t get a payment card because they don’t have an address. There are issues facing people that have a different legal status.

When you reach a critical mass of general digitalization, you are totally dependent upon that. And that has consequences for payments that weren’t thoroughly discussed or thought through. American banks need to think about how they will deal with these groups. The worst-case scenario for banks is that the government makes a law that would be very expensive for them to ensure accessibility to these groups.

Does a cashless society raise cybersecurity risks for banks?

I don’t think banks will face more cyber risks if cash goes away because they already have their IT departments that will probably get some additional resources to defend themselves. But cybersecurity in general is a huge problem because there is this push toward real-time payments. The fraudsters are having the time of their lives because customers can access all their accounts and make real-time transfers immediately. There are no delays, which is problematic.

In Sweden, there are serious discussions about the immediate transfer of funds. Some banks are giving customers the opportunity to add restrictions so that money cannot be sent immediately. For example, it could take two days before funds are transferred from a customer’s account, giving them some time to reflect. ‘Should I make this payment to somewhere?’ There is clearly a risk.

Banks need to think in a different way of what kind of feedback mechanism should be in place for real-time payments, even though cashless real-time payments have some benefits. At Silicon Valley Bank, customers were able to withdraw money in real time. Banks need to reflect on whether everything should be real time. That is the lesson.

Will the FTX cryptocurrency scandal inhibit the movement toward cashless societies?

No. The average person does not know what crypto is. It is not an issue. Banks basically avoid dealing with crypto. The only country that is crypto-friendly is Switzerland. In some parts of Switzerland, you can pay your taxes in bitcoin if you want. But for the rest… this scandal has no implications.

Jonas Hedman is a professor in the Department of Digitalization at Copenhagen Business School in Denmark.

Edmund Lawler is a contributing writer at BAI.