Why Are Scandinavians So Far Ahead of Americans in Using Electronic Payments

Americans are the biggest users of checks in the world. Close to 100 billion checks are written every year in the United States, and over three-quarters of noncash transactions are conducted with paper. In contrast, in most countries of Europe, more than two-thirds of noncash transactions are electronic, with Finland and Sweden having the greatest proportion of online banking customers of any countries in the world. Indeed, if you were Finnish or Swedish, instead of writing a check, you would be far more likely to pay your bills online, using a personal computer or even a mobile phone. Why do Europeans and especially Scandinavians so far outpace Americans in the use of electronic payments?

First, Europeans got used to making payments without checks even before the advent of the personal computer. Europeans have long made use of so-called giro payments, in which banks and post offices transfer funds for customers to pay bills. Second, Europeans—and particularly Scandinavians—are much greater users of mobile phones and the Internet than are Americans. Finland has the highest per capita use of mobile phones in the world, and Finland and Sweden lead the world in the percentage of the population that accesses the Internet. Maybe these usage patterns stem from the low population densities of these countries and the cold and dark winters that keep Scandinavians inside at their PCs. For their part, Scandinavians would rather take the view that their high-tech culture is the product of their good education systems and the resulting high degree of computer literacy, the presence of top technology companies such as Finland's Nokia and Sweden's Ericsson, and government policies promoting the increased use of personal computers, such as Sweden's tax incentives for companies to provide their employees with home computers. The wired populations of Finland and Sweden are (percentage-wise) the biggest users of online banking in the world.

Americans are clearly behind the curve in their use of electronic payments, which has imposed a high cost on the U.S. economy. Switching from checks to electronic payments might save the U.S. economy tens of billions of dollars per year, according to some estimates. Indeed, the U.S. federal government is trying to switch all its payments to electronic ones by directly depositing them into bank accounts, in order to reduce its expenses. Can Americans be weaned from paper checks and fully embrace the world of high-tech electronic payments?

E-Money Electronic payments technology can not only substitute for checks, but can substitute for cash, as well, in the form of electronic money (or e-money), money that exists only in electronic form. The first form of e-money was the debit card. Debit cards, which look like credit cards, enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchants account. Debit cards are used in many of the same places that accept credit cards and are now often becoming faster to use than cash. At most supermarkets, for example, you can swipe your debit card through the card reader at the checkout station, press a button, and the amount of your purchases is deducted from your bank account. Most banks and companies such as Visa and MasterCard issue debit cards, and your ATM card typically can function as a debit card.

A more advanced form of e-money is the stored-value card. The simplest form of stored-value card is purchased for a preset dollar amount that the consumer pays up front, like a prepaid phone card. The more sophisticated stored-value card is known as a smart card. It contains a computer chip that allows it to be loaded with digital cash from the owners bank account whenever needed. Smart cards can be loaded from ATM machines, personal computers with a smart card reader, or specially equipped telephones.

A third form of electronic money is often referred to as e-cash, which is used on the Internet to purchase goods or services. A consumer gets e-cash by setting up an account with a bank that has links to the Internet and then has the e-cash transferred to her PC. When she wants to buy something with e-cash, she surfs to a store on the Web and clicks the "buy" option for a particular item, whereupon the e-cash is automatically transferred from her computer to the merchant's computer. The merchant can then have the funds transferred from the consumer's bank account to his before the goods are shipped.

Given the convenience of e-money, you might think that we would move quickly to the cashless society in which all payments were made electronically. However, this hasn't happened, as discussed in Box 3.

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