Sweden as a role model? About the opportunities and risks of abolishing cash

The saying “Only cash is true” is still valid for some consumers despite alternative payment options such as card payments, online or app transactions. For example, because banknotes and coins have a high emotional value, especially in Germany, are currently accepted almost everywhere and can be deposited at home as “nest eggs.” Critics, however, complain that cash plays into the hands of fraudsters and money launderers, interest-free savings hamper economic growth and complicate monetary policy.

Corona pandemic accelerates the abolition of cash

Cash usage in Germany declined significantly during the pandemic. Partially out of concern about a possible SARS-CoV-2 infection through banknotes and coins or the request of many retailers to make contactless payments. In part because consumers spend more money on the Internet, such as online shopping or streaming.

Although it was Cash in German retail Still the dominant payment method with a revenue share of 40.9 percent in 2020. However, cash lost 5.6 percentage points compared to the previous year. In contrast, Girocard won with a share of 40.1 percent plus 6.5 percentage points compared to 2019.

When paying in online retail, German customers were able to choose from an average of eight different payment methods in 2020. Purchases by invoice, direct debit and credit card were the payment methods with the highest turnover in e-commerce. The number of online shops that offer mobile payment methods such as Apple Pay and/or Google Pay also rose by 3.5 percentage points to 4.8 percent compared to the previous year.

There has been an even more concise shift away from cash across Europe. According to one current study On average, only 36 percent of consumers in ten European countries prefer to pay in cash. A year ago, it was significantly higher at 43 percent. The corona pandemic has accelerated the switch from cash to digital payments by three to five years worldwide. For example, cashless transaction volumes globally will increase by more than 80 percent to 1.9 trillion (2020:1 trillion). By 2030, the number of digital payments per person is likely to almost triple. Compared to the rest of the world, the Asia-Pacific region will grow the fastest, followed by Africa and Europe.

Scandinavian countries are leading the way in cashless payments

However, there are still very big differences within Europe: Despite the corona crisis, cash is still the most popular in Austria and Germany. In contrast, cash only plays a minor role in the Netherlands, Denmark, Finland and France, according to the study. Sweden is at the bottom of the scale, where only 15 percent of respondents prefer to pay with notes and coins.

The country is thus once again living up to its pioneering monetary role: The Swedish central bank was the first country in Europe to issue banknotes in 1661. Now the Swedes will once again be the first to abolish banknotes. Cash is already no longer accepted in many places. Even small amounts at markets, for donations or magazines are billed using mobile card readers. In the meantime, over 90 percent of payments Made cashless in Sweden. Sweden plans to be completely cashless by 2023.

The result of Swedish pioneering work has been positive so far and is supported by the tech-savvy society. This is because electronic payment is in line with advancing digitalization and offers advantages for B2B and B2C transactions. For example, there are no costs for transporting physical money, amounts are paid exactly and quickly, and cash theft or robberies at banks and cash transporters have fallen sharply.

However, skeptics are critical of the switch to digital payment methods on several levels. On the one hand, because people without an account are automatically disadvantaged or excluded from cashless transactions. On the other hand, even the digital wallet is not immune to theft by hackers or a “blackout” that paralyzes the power grid or the Internet.

Data protectionists also criticize an invasion of privacy. Since transaction data is generated and recorded during every payment transaction, payment providers gain significant insights into the consumer behavior of each individual.

Economists, in turn, argue that savers without cash can no longer avoid negative interest rates controlled by central banks and passed on by commercial banks by withdrawing, spending, or depositing their money at home. Citizens then only have the choice between real devaluation of money through penalty interest rates or forced consumption.

Germans prefer coins and notes

The sentiment in Germany towards the abolition of cash is more likely to follow the negative aspects. German citizens would be critical of the abolition of cash in Germany or its limitation. According to one Study by the Federal Association of German Banks Eight out of ten respondents do not want to give up cash in the future either. For several reasons: Cash leaves no “digital traces,” which represents an important pro-cash argument for Germans concerned about their privacy.

Physical notes and coins also make savers autonomous from financial institutions: If you no longer trust your bank, you can simply withdraw cash. Furthermore, cash gives you more control over your own spending, whereas transactions via card, smartphone or online platforms only become obvious when you look at your account balance.

But cashless payments also have advantages in Germany. Merchants would have lower costs for managing cash and potentially higher revenue as customers tend to spend more money contactlessly or with a card. Private individuals can process transactions cost-effectively, quickly, easily and securely and would “store” less cash at home without interest.

The economy would also benefit from the digitization of the monetary system, which will also change the requirements for money and payment processes as digitization progresses rapidly. Industry 4.0 is increasingly becoming a reality. Complex, digitally integrated value chains are created, business processes are fully automated and synchronous, and in the Internet of Things, machines can communicate with each other and process payments independently.

This is only possible with reliable payment solutions and Digital currencies such as the planned e-euro. Until 2023, the e-euro is still in an investigation phase. The exact structure is still being discussed, but two parameters have already been determined: The digital euro is issued and controlled by the ECB and is only intended to usefully supplement cash, not replace it. In addition, in contrast to Bitcoin and other cryptocurrencies, the central bank remains in control of the digital currency and thus wants to guarantee stability and security.

Cryptocurrencies pave the way for DeFi

In general, digital currencies should not be confused with cryptocurrencies such as Bitcoin, which are unregulated objects of speculation, fluctuate very strongly in value and are exposed to the risk of total loss. Bitcoin & Co. therefore do not fulfill the most important basic functions of money as a store of value and medium of exchange.

But the blockchain technology on which Bitcoin and most other cryptocurrencies are based has laid an important foundation for the development of the entire DeFi (Decentralized Finance) sector. DeFi is an openly accessible ecosystem for financial applications that are developed based on blockchain technology, meet regulatory requirements, but function without intermediaries such as banks. Applications run on public and programmable blockchain networks and have smart contract functionality.

Smart contracts are programs that can automatically execute stored rules and predefined conditions. They can cover a large part of the range of services provided by financial institutions. For example, lending or trading in financial products. Furthermore, with the help of blockchain infrastructure, even Tangible assets such as real estate, art, classic cars or diamonds are issued via specialized marketplaces, tokenized (broken down into smaller, digital units) and traded by market participants.

In summary, it can be said that digitization certainly has advantages for the financial ecosystem. Be it in the form of digital payment methods, regulated digital currencies issued by central banks, or tokenized assets. With the help of blockchain, transactions can be processed faster, more cost-effectively and at a lower threshold than with traditional fiat currencies — while respecting regulatory and security requirements.