The chart below shows that between 2007 and 2018 the value of cash in circulation was almost halved dropping from SEK 111 to SEK 57 billion. The decline was continued but quite irregular: it was below 5% per year between 2007 and 2012 but then accelerated to two-digit rates in 2013, 2015 and 2016. At that point, many observers projected that cash would disappear altogether in Sweden before the end of the following decade. But then, rather unexpectedly, in May 2018 the curves crossed, pointing to a year-on-year increase of cash in circulation by 7.23 %. And at the end of February 2019, the trend has continued at a similar pace.
Another surprising fact about the evolution of demand for Swedish notes is that the decline has been mostly driven by the return of high-denomination banknotes. According to the BIS Quarterly Review (March 2018) globally « cash is being increasingly used as a store of value rather than for payments. Over the last decade, the demand for large-denomination notes has outpaced that for smaller denominations ». Sweden is again an outlier as the value of high denominations has declined significantly faster than that of small transactions, as illustrated by the chart below. One explanation is that access to SEK 1,000 is more difficult and more expensive due to a combination of central bank fees and commercial bank policies not to distribute them.
Average value of banknotes and coins in circulation, SEK billion
For many proponents of digital payments and money, Sweden has been an extraordinary laboratory and for many a model to follow. The Singapore Payments Roadmap commissioned by the Monetary Authority of Singapore, recommends to follow measures adopted in Sweden to accelerate the adoption of digital payments including the pooling of ATMs into a single network and the reduction of cash and cheque usage. In France, the CAP 22 Committee, which was appointed by the government to improve the quality and cost efficiency of public services, recommends in its 2018 report, to gradually head towards a no-cash society, ‘following the Swedish model.’
However, in Sweden the road to no-cash is not without challenges and has triggered reactions from citizens and regulators. Sweden is one of the few countries in the world to harbour a pro-cash movement Kontant uppropet – Sweden’s cash Uprising – led by Björn Eriksson, former president of Interpol and former Swedish police commissioner. Eriksson believes that the push for a cashless society is only making payments more opaque to the benefit of banks. Even economist, Niklas Arvidsson, from Stockholm’s Royal Institute of Technology states, “It’s clear that banks have a business incentive to reduce the use of cash”. In March 2018, the Riksbank Governor Stefan Ingves has argued that phasing out coins and notes could put the entire country at risk should Sweden encounter a “serious crisis or war”. In May, the government distributed a pamphlet to 4.8 million households illustrating how to prepare for a war or a crisis.As part of the basic essentials for survival, the pamphlet concludes that each individual should have enough cash stashed away, preferably in small denominations. In May 2018, a Parliament Committee concluded «that everyone in society must have access to basic payment services at reasonable prices. This includes the opportunity to make cash withdrawals, payment processing, and the possibility for associations and businesses to deposit their daily receipts.»
It is still early days to find rational explanations for the unexpected growth in cash demand in Sweden. It is also unclear as to whether the trend will continue or whether 2018 will stand out as an exception. But let’s make some bold guesses!
First assumption: the recommendations formulated by the various authorities and mentioned above to slow down have paid off and have encouraged consumers to switch back to cash. It may be surprising for many that policy decisions would have such a rapid impact but it reminds me of a Swedish friend explaining that “We Swedes are very law-abiding people”.
Second assumption: cash has a long tail. There is a minimum threshold of cash required to support all segments of society, including the unbanked, the elderly, children, migrants… By the end of 2017, cash in circulation represented about 1% of GDP. Interestingly, in 2007 the Cash/GDP ratio in Iceland was also hovering around 1% of GDP; “since the 2008 financial crisis, Iceland has seen a tremendous resurgence in the demand for cash” as highlighted by JP Koning.
A third hypothesis is the impact of the currency changeover which took place between October 2015 and June 2018. The Riksbank renewed the entire banknote and coin series during the period. The operation involved the staged invalidation of the old series. After July 2018, old notes and were no longer accepted at stores or banks. This short transition period may have encouraged users to bank their notes. Now that the changeover is over, citizens may be switching back to cash.