Sweden Future Proofs Payments

Sveriges Riksbank has issued its 2022 Payments Report into the retail payments market ¹. The report underlines the wide-ranging activities of the Riksbank to support the needs of all sectors of society when it comes to payment – access to payments for all whether in-person or not, including those who find the digital world a challenge, instant payments, efficient payments, cross-border payments and future payments.

The challenges and concerns faced will be shared by many countries, not just those in Europe, and the solutions will be of interest even where shaped by Sweden’s position within the Nordic, European and global community, and by Sweden’s banking and societal structure. Resilience, efficiency, co-operation and preparing for the future are recurring themes in every section of the report.

Survey findings

The Nordic countries – Sweden, Norway and Denmark – are amongst the lowest cash users and the most digitally connected in the world. 90% of Swedes use the internet on a daily basis and 75% use mobile e-ID.

The 2022 survey showed the number of card transactions increasing but their value falling. The report wonders whether this is linked to the 2015 card fee rules across the European Union (EU) and European Economic Area that lowered the cost to merchants of accepting card payments, the convenience of contactless payments and the increase in mobile phone payments (that are linked to cards).

Over 80% of in store purchases in the Nordic countries are made digitally and 75% of Swedes had shopped online in the last 30 days. The proportion of older people shopping online in the last 30 days had grown from 26% in 2018 to 55% in 2022, the biggest increase of any age group.

SWISH is an instant payments system used for online and person-to-person (P2P) payments. SWISH is based on a private system delivered by Betalningar i Realtid (Bir). 95% of 15-65 year olds have downloaded the SWISH app and 25% of people also have access to other digital payment means, mainly 18-44 year olds.

Cash payments in store have fallen steadily year-on-year, reaching only 8% in 2022. The difference between the behaviour of older and younger people has virtually disappeared for all but the very oldest.

Access to cash

Part of the population does not have access to digital payment methods and therefore uses cash. It is hard to pay bills or to redeem payments such as pensions without access to digital payments. The Riksbank believes the ability to buy vital goods and services using cash should be legally protected.

The Riksbank has identified older people, those refused bank accounts and asylum seekers as needing to retain access to cash. 42% of people over 75 years old and 18% of those 66-75 years old need help to pay bills at an online bank. People without Swedish issued identity documents were those who had problems opening bank accounts.

In 2017 660 bank branches offered cash services. In 2022 no major banks offered cash services and only 134 savings bank branches offered cash services. This withdrawal of cash services has created an acute problem for coin deposits and has meant people are now dependent on ATMs to access cash.

Until August 2022 Kassagirot enabled 149 petrol stations and grocery stores to act as payment service agents. This was the only service in Sweden recognising migrant identity documents to allow bill payments.

With the withdrawal of this service, 15 out of 21 Swedish county administrative boards found basic payment services not to be satisfactory, up from three in 2021. A solution is needed to address this challenge.

New bank act

The new Sveriges Riksbank Act 2023 Act became law this month. The Riksbank will increase its number of cash depots from today’s one to five by 2026. It now has responsibility for cash management and will need to work with Sweden’s counties and Swedish Post and Telecoms Authority to manage this. It is also required to put in place civil contingency plans for payments.

The Riksbank wants stronger legal protection for parts of the cash infrastructure. Currently some credit institutions must provide cash services but only for cash withdrawals and deposits of daily takings. They must also offer manual cash services for those who cannot use ATMs or other automated or digital services.

The Riksbank has identified a failure of Loomis to deliver cash services, for whatever reason, as a risk. It needs a political answer to the question whether it is acceptable to have only one provider.

Payment resilience

In the event of disruption to electricity supplies or data communications people still need to be able to pay by card, SWISH and withdraw cash. Work to enable this needs to be prioritised.

In the week that Russia invaded Ukraine, the number of ATM withdrawals increased by 28% but the use of cash in commerce did not change. The money is being hoarded as a response to uncertainty. The Riksbank is clear that cash cannot replace all digital payments, particularly high value payments such as salaries, pensions and the payment of invoices. It also believes reliance on one payment method is unwise.

The report gave details of how the National Bank of Ukraine has achieved resilience in its payment system following the Russian invasion – see bottom text.

System risks

Risks in the system lie with over-reliance on a few key players such as Loomis, Sweden’s only national cash in transit company, Bancomat AB, who run the ATM network for the commercial banks and BankID, which is run by the banks to link the individual to their account. In 2022 both SWISH and Swedbank experienced outages and this highlighted the risk of failure.

The payment system is based on the four-party model (card holder, recipient, redeemer of the card payment and card issuer). Visa and Mastercard use monetary limits to limit offline transactions. Card holders have no idea about the offline capability of their cards.

Norwegian example

The Riksbank has looked at what Norges Bank has done to enable offline capability, made easier by Norway having national payment cards and a national card network, and is in discussions to see whether this can be replicated in Sweden.

Norway has strengthened its preparedness for card payments by introducing a new back-up solution that allows terminals to work offline for seven days at several grocery chains, pharmacies and petrol stations. It has also increased the requirement for banks to hold cash reserves.

The Riksbank wants critical sectors to plan payment acceptance even if IT systems, power supplies and data communications fail.

Crime

While counterfeiting of cash is low, mainly the SEK 500, the Riksbank is aware that the public knowledge of what defines a genuine banknote is reducing.

For payments, the introduction of strong customer authentication in January 2021 based on knowledge (password or PIN), possession (card or phone) or inherence (something unique to the user such as a fingerprint) has meant card fraud is relatively low compared with international levels.

There have been 11,000-15,000 cases of online e-commerce fraud each year, and new proposals to prove identity are being brought forward to improve SWISH and BankID.

Government e-ID

Given that the state issues passports and identity cards, the Riksbank believes there is a need for a government issued e-ID.

This is important for payments and will allow increased competition and equal access to e-ID for all citizens.

Instant payments

The Riksbank has updated its RIX settlement system so that instant payments can be settled in central bank money using RIX-INST. RIX-INST allows payments to be settled as they occur rather than in batches, operating constantly. This will allow account-to-account payments. The Swedish banks need to adapt their systems to be able to use RIX-INST and they are expected migrate from SWISH to RIX-INST before summer 2023.

RIX-INST has been introduced to meet the regulatory proposals of the European Commission (EC) which are an update of the Single European Payment Area regulatory framework.

Bankgirot is the other main central payment hub, and this is being replaced by Nordic P27. As part of this the Swedish payment market changed its message format of payments in May 2022 to comply with ISO20022, which will allow future cross-border payments to meet the latest standards.

Safe and efficient payments require a clear regulatory framework, a resilient system and multiple payment methods. To achieve this, co-operation is necessary and Sweden has a private-public co-operation in the financial sector group (FSPOS).

Efficiency

The Riksbank last looked at the cost of payments in 2009 with the report published in 2012. It is currently planning to publish its next report early this year.

Norges Bank carried out a survey in 2020, published in 2022, that found the social cost of cash payments was NOK19 whereas card payments were NOK 5. This is a similar result to the 2012 Riksbank report.

Cross-border payments

Cross-border payments need to become faster and cheaper. To this end the Riksbank is taking part in a range of forums and projects. 10% of people send money abroad each year and the average cost of international transfers is 2-3%.

The Nordics Payment Council (NPC) works across Denmark, Norway and Sweden. It uses a common language, allowing standards and guidelines to be followed and modern standards to be adopted (ISO 20022) so that it is easier to manage payment data and to work across the jurisdictions.

Swedish digital cash

The Riksbank sees the need to develop a digital complement to cash as a protection against the continued decline in cash, to increase payment resilience, to allow payment innovation and because a digital euro could be issued. A decision about progressing to a realisation phase for the Digital Euro is being made in September 2023.

Parliament initiated a commission of enquiry into an e-krona in December 2020 and this will report by the end of March 2023.

The Riksbank has engaged in international and national dialogue forms about an e-Krona in 2022 and it issued a request for information for digital solutions in April 2022. As part of its preparations, the Riksbank is conducting research into how individuals experience different payment situations.

Final word

Sweden is modernising its payment system ready for the future. At the same time, it is seeking to maintain a payment system resilient against shocks and rapid change. It is leading in its work to find a way to maintain cash, but it is clear sighted about why this needs to be done. A useful report.

Resilience in War

Payments in Ukraine before the invasion were not as digital as in Sweden but digital payments were at a high level. 72% of people over 15 years old had payment cards and 62% had mobile phones. When the invasion started the National Bank of Ukraine (NBU) wanted to minimise the transportation of cash. It asked people to use digital payments and to access cash from shops rather than from ATMs or bank branches.

Since the war started Ukraine’s digital payment systems have continued to work both nationally and internationally. The central settlement system has also worked. The NBU and the financial and payment market participants worked together to ensure different locations were used and the NBU allowed information resources to be stored in the cloud outside of Ukraine.

The exchange rate for the hryvnia was fixed and the NBU restricted the possibility to purchase foreign currency in Ukraine. The NBU entered into agreements with a number of European national central banks to allow refugees to exchange hryvnia when abroad. It fully guaranteed deposits held in accounts in Ukrainian banks.