Even as Sweden is expected to go cashless by 2023, and cashless options are gaining traction globally, there is a growing clamor to keep cash alive. In the U.S., for instance, cities such as Philadelphia, New York, San Francisco and New Jersey have introduced bills to ban retail establishments from refusing to accept cash. The European Central Bank (ECB), governing the 19 European Union countries using the euro, believes everyone must have cash as a payment option.

“Many countries have already learned that the speed with which Sweden has developed towards a cashless society has side effects, which must be taken seriously,” says Henk Esselink, head of the issues and circulation section for the currency management division at the ECB. In a conversation with Knowledge at Wharton, Esselink discussed why cash matters, and how the dynamics between cash payments and cashless payments are likely to play out in the coming years.

An edited transcript of the conversation follows.

Knowledge at Wharton: Sweden is expected to become the world’s first cashless society by March 2023. Do you think this is a positive move for Sweden and also for the world at large?

Henk Esselink: Apart from the academic question as to when a society is regarded as cashless, I think it is impossible to anticipate a precise date, or even a year, when a country becomes cashless. In Sweden, consumers prefer to pay less with cash, and banks and retailers prefer not to handle cash. This is acceptable as long as it is by choice and they don’t feel forced to do so. The ECB believes that everyone should have the choice to pay with cash, card or any other means of payment that may be offered, but that cash should be among the options. If a cashless society means that people no longer have access to cash or cannot pay with cash at all, that would be a bad thing.

Even in Sweden, some groups may become, or feel, socially excluded if cash is no longer available or accepted. There are also large groups in society which use cash for budgeting purposes. Several studies have shown that consumers spend more money if they pay by card, instead of cash. In a 2017 ECB study on the use of cash by households in the euro area, we asked people why they prefer cash. The most often mentioned reason was that by using cash you have a clear overview of your expenses. I would imagine that in many countries in the world with on average lower incomes than in Sweden this argument is even more important. Moreover, cash ensures that citizens can exercise their fundamental right to privacy. Again, this may not be so much of a concern for Sweden, but it is certainly an issue in many countries in the world.

So, probably the positive aspect of Sweden becoming a cashless country would be that it is a test case for the rest of the world. Maybe the experience in Sweden can help other countries to develop policies to prevent cash from disappearing. Many countries have already learned that the speed with which Sweden has developed towards a cashless society has side effects, which must be taken seriously.

“The ECB believes everyone should have the choice to pay with cash, card or any other means … but that cash should be among the options.”

Knowledge at Wharton: In an interview with Knowledge at Wharton, Jonas Hedman, associate professor at the department of digitalization at the Copenhagen Business School, said becoming cashless is inevitable, not just for Sweden, but for other countries as well. Do you agree?

Esselink: The whole world is looking at Sweden, which seems to take pride in being on its way to becoming a cashless society. But what is often overlooked is that according to the 2018 payment patterns study of the Riksbank [Sweden’s Central Bank], the majority of respondents said they used cash in the last month of the interview, 31% of the population said they withdraw cash one to three times a month, and 6% said one or more times a week. These are non-negligible parts of the population.

Moreover, even Sweden saw an increase in banknotes and coins in circulation in value terms in 2018 compared with 2017. But apart from Sweden and Norway, which experienced two consecutive years of decline of banknotes in circulation in the years before (which may also have to do with the introduction of a new series banknotes), in nearly all countries in the world the demand for cash is still increasing year on year. This is true even for developed countries with a good cashless payment infrastructure like the U.S., Japan, and the euro area. In the euro area, even the two lowest denominations, the 5 euro and 10 euro bills, which are typically only used for transaction purposes, have shown growth rates over the last 10 years which outpace GDP growth. I agree that we can expect many economies to become much less dependent on cash in the coming years, but that doesn’t mean that cash will disappear.

The circumstances in every country are different. For example, in Germany, people have a very different view about privacy than in Sweden. In many countries, central banks see the supply of cash as a core activity. In the U.S., various states have issued laws that make it mandatory to accept cash. The main reasoning behind this is that cashless shops [are viewed as] discriminating against people who don’t have bank accounts or access to electronic means of payment. Globally, there are well over 1.5 billion people who don’t have bank accounts. For most of them, cash is the only way to pay. So, although we are moving to a “less cash” society in several countries, it is premature to conclude only from the Swedish experience that a cashless society is inevitable.

Knowledge at Wharton: How do you expect the dynamics between cash payments and cashless payments to pan out in the coming years?

Esselink: I can only talk about the euro area, but we will probably see similar developments in other countries, too. The share of cash payments at points of sale will decline due to the increase in card accepting terminals, contactless payment options, person-to-person and instant payment options, and in general due to the increase in online payments. However, the decline will not be as fast as many predict. In 2030, a considerable share of payments will still be in cash, at least in terms of number of payments.

In the euro area, with a generally good payment infrastructure, on average 79% of the number of all transactions were in cash in 2016. If we take the development in the use of cash in the U.K. or the Netherlands in the last 10 years as a reference — countries which had a significant decline in cash use — and extrapolate this trend to the euro area, then on average in the euro area in 2030 close to 50% of all payments would still be made in cash. However, there will be some countries where the share of cash in number of payments will be much lower than the euro area average. In terms of value of transactions, the share of cash will be considerably lower than in number of transactions, as it is already the case now.

Knowledge at Wharton: When it comes to cash payments, what are the main trends you see?

Esselink: In a recent IMF study titled “Cash Use Across Countries and the Demand for Central Bank Digital Currency,” authors Tanai Khiaonarong and David Humphrey conclude that normal demographic change, coupled with a preference for non-cash payments by the younger portion of the population, is sufficient to explain yearly average reduction in cash use across the countries they analyzed. I think this is a realistic conclusion. It is evident from various studies that younger generations are more inclined to pay cashless and adopt new means of payment. So as new generations come, and older generations disappear, the share of cash in payments at points-of-sale will almost naturally decline.

Furthermore, expect cash to be increasingly used for mainly smaller value payments in places where cash is still convenient and cost efficient. This is typically in smaller shops, at marketplaces, and in bars and restaurants. Another trend, more related to the logistics: cash will be recirculated more locally. This means that people will get cash from shops and typical banking services will be provided by machines in retail stores. This will make cash more efficient and will allow people to get access to cash even in areas where banks and ATMs have disappeared. All these trends have already started, and we will see them develop further in the next decade.

Knowledge at Wharton: What trends are you seeing in non-cash payments?

“We can expect many economies to become much less dependent on cash in the coming years, but that doesn’t mean that cash will disappear.”

Esselink: In the euro area, I see contactless payments as the main driver of the increased use of cards. In our survey on the use of cash, it appeared that consumers value the speed of transactions. For retailers also, and in particular the supermarkets, transaction time is very important, as it is a cost. Initially, card and PIN transactions of low value will be substituted by contactless card transactions. But the convenience will likely also induce some of the cash users to use contactless technology. In the euro area, 81% of all transactions were below 25 euros in 2016. Therefore, I see a large potential for contactless here. I don’t see instant payment solutions as a major threat to cash in the coming years. It will replace some of the person-to-person payments, and some of the very high-value cash payments, like for furniture and second-hand cars.

Also for services in and around the house this could replace some cash transactions. But since in the euro area two-thirds of all transactions at points of sale are done in shops for day-to-day items and in bars, restaurants and cafés, I expect the impact of instant payment solutions on cash to be rather limited. But if suppliers of these solutions make an appealing business case for retailers and consumers, it may gain market share in the euro area, first by replacing card payments and maybe later on also some cash payments. In countries with a less well-established card network, such payment solutions may gain further ground.

Also, internet commerce is expected to increase in the coming years. And although in some countries it is possible to pay with cash at the pick-up points, most internet transactions are done with non-cash means of payments. Therefore, the increase in internet commerce will also increase card payments and other non-cash means of payment.

Knowledge at Wharton: What do you think are the major advantages of becoming a cashless society? Could you explain with examples?

Esselink: Asking someone who is working on the issuance of banknotes in the euro area what the advantages of a cashless society are, is asking the turkey to vote for Christmas. I will nevertheless try to mention some of the arguments that some have put forward, but will at the same time explain why these arguments are not always convincing.

Some claim that cash is expensive and that non-cash means of payment are cheaper. From various studies we know that it depends on the country, the infrastructure, and the number and value of payments. Generally one can say that for larger value payments the societal costs of cards are indeed lower than for cash. But for low value payments, cash is still cheaper than cards. If we are not looking at the societal costs, one could say that it depends on each business whether cash or cards is cheaper. For a large supermarket which can negotiate good conditions for the merchant fees and which has many transactions, the break-even point between cash and cards may be different than for a small shop that has few transactions.

Some also say that in a cashless society there will be no robberies of cash and no ATM attacks. However, this does not mean that there will be no criminals. If cash disappears, criminals will find other ways to get other people’s money, like we already see now with phishing sites aiming at getting access to online banking, online credit card fraud, etc.

Another argument of a cashless society is that crime and tax evasion would be reduced. But again, those who want to launder their money or evade taxes will always find ways to do so. I only have to refer to the Panama papers and the Paradise papers and everyone will understand what I mean. If a country became cashless, criminals would, of course, start using other currencies. Professor [Friedrich] Schneider [of Austria’s Johannes Kepler University in Linz] estimates that if cash was completely abolished the shadow economy may be reduced by 20%, and proceeds from crime may be reduced by 10%. That is of course a good thing, but one may wonder whether this could not be achieved in a less disruptive way than by completely abolishing all cash. Interestingly, although Sweden is the country with the lowest use of cash in Europe, it is not the country with the smallest shadow economy.

Knowledge at Wharton: What are some other disadvantages and challenges of a cashless society?

Esselink: As I mentioned earlier, there are multiple groups in society which rely on cash. For vulnerable groups, like the elderly, visually handicapped, people who use cash for budgeting purposes or even children, cash is important, or even essential, as they do not have access to account-based means of payment.

In a developed country like the United Kingdom 2.7 million people (i.e. around 5% of the 16+ population) mainly rely on cash. People may also wish to use cash to keep their transactions private for legitimate reasons. The challenge is to make sure these groups remain to have access to cash. Further, cash provides immediate settlement, and transactions can be effected without infrastructure or costs.

Also, in many European countries there is no national card scheme. This means that the whole retail payment system relies on two international card schemes not located in the EU. Without cash, there would be no competition for cards and the fees for card use and acceptance may go up. There would also be no back-up in case card payment systems fail. Although cash also relies on a technical infrastructure, it may still be a business continuity measure for certain events affecting the retail payment system.

Finally, cash is the only way citizens have access to central bank money. Following a crisis, like for instance the Lehman Brothers crisis, many people went to the bank to withdraw cash from their accounts. If there were no cash, there would be no option for citizens to get their money out of the private banking system. Indeed, what is often forgotten is that cash is an important means to store value. Actually, the largest part of the euro banknote circulation is used as store of value within the euro area and abroad.

Knowledge at Wharton: How can these challenges be mitigated and resolved?

Esselink: All stakeholders in the cash cycle, including central banks, commercial banks, cash management companies and retailers must work together to keep the cash distribution and handling efficient with declining volumes. They must join forces to keep cash available by providing a good coverage of the ATM network, while retailers should continue to accept cash.

Retail automation such as smart safes for the automated acceptance and processing of cash by retailers may reduce the handling costs for retailers and cash-in-transit companies, and may reduce security risks. At the same time, policy makers, banks and retailers should think about alternatives for cash and the dependency on two international card schemes. In this respect one could think of creating interoperability of national card schemes in Europe. But one can also think of instant payment solutions. With launch of TARGET Instant Payment Settlement (TIPS) in November 2018, the Eurosystem has laid the groundwork for the development of innovative, customer-friendly retail payment solutions.

“All stakeholders in the cash cycle, including central banks, commercial banks, cash management companies and retailers must work together to keep the cash distribution and handling efficient with declining volumes.”

It is now up to the market to develop applications that meet the requirements of consumers and retailers. In the further away future, one could also think of central bank digital currencies as alternative for cash. But at this stage I would say it is easier, cheaper and safer to ensure a good cash supply than to replace cash by a central bank digital currency. This may however change over time, once many of the issues that are connected to central bank digital currency have been overcome.

Knowledge at Wharton: Jonas Hedman said most Swedish bank branches are cash-free and it’s hard to find a bank that accepts cash. Do you think it’s acceptable for banks to be cash free or must banks have an obligation towards their customers to accept and dispense cash at the branches?

Esselink: Swedish banks have to comply with an EU Directive (2014/92/EU) on access to payment accounts with basic features that requires banks to provide a basic bank account and basic banking services. Providing cash is part of the basic banking services (Article 17 of the said directive). One may also regard the funds on bank accounts as a credit by the account holders to their bank, and the customers are entitled to claim back their money from the bank. The claim refers to legal tender – banknotes or coins – as long as no other legal tender exists. Citizens and businesses should therefore carefully study the tariffs and conditions of their banks when opening new bank accounts for payment services.

Knowledge at Wharton: Given the pros and the cons of a cashless society, how must governments and financial institutions respond?

Esselink: Governments and financial institutions must make sure that citizens have the choice to pay with the payment instrument of their choice. They should promote the efficiency of all means of payments. At the same time, they should also ensure that a competitive market for retail payments exists with different cashless retail payment solutions, and not only payment cards as alternative. In some countries which rely almost entirely on cash it is logical that the efforts would be to encourage cashless means of payments, whilst making sure that people keep the options to pay with cash. Meanwhile, in countries where cash as payment option may disappear, they should take measures to ensure cash remains a viable payment option as a kind of public good, especially considering that payment cards and new payment solutions have already an enormous backing by the private sector such as the card schemes, banks and fintechs.