Offline payments can improve resilience to disruption
Published: 15 December 2022
The underlying infrastructure for both cards and cash is dependent on functioning electricity and data communications. A prolonged disruption in which electricity or digital infrastructure is knocked out would therefore make it difficult to use both cash and cards.
Cash services depend on electricity and data communications
Demand for cash in Sweden increased rapidly when Russia invaded Ukraine (see Many withdrew cash after Russia’s invasion of Ukraine). Thanks to good cooperation between Loomis, Bankomat and the Riksbank, demand could be met without interruption. However, a scenario in which electricity or data communications are knocked out could be more difficult to manage.
As responsibilities stand today, it is up to the banks to ensure that their customers can withdraw money from their bank accounts. The major banks have chosen mainly to use Bankomat to give their customers access to cash. Bankomat is currently investigating the feasibility of withdrawing and depositing cash via their ATMs even when electricity or communication networks are not working. It is important that this work continues as it contributes to strengthened preparedness.
Limited ability to pay by card offline
The card payment infrastructure in the Swedish payment market is based on a four-party model in which the key actors are cardholders, payment recipients, redeemers of card payments and card issuers. Occasionally, a disruption may occur so that controls between the players cannot be carried out, for example in case of a power failure or when data communications are not working. When a payment is made even though at least one actor is unavailable, it is usually referred to as an offline payment.
Illustration 3. Card infrastructure
All payment cards on the Swedish card market are connected to international networks, such as the VISA and Mastercard networks. These networks have rules limiting possibilities for offline payments, usually in the form of monetary limits. The card issuers, which are usually banks, are subject to the networks’ rules but can also set parameters in cards’ chips to further limit the cards. Customers rarely know whether their cards will work in offline mode. It is important that card issuers are transparent about what applies to individual customers’ cards.
Credit cards generally have a greater scope for offline purchases than debit cards. A credit card allows the cardholder to make purchases on credit without an adequacy check being run against their account, only a check against the existing credit limit. Instead, the cardholder has the option of paying all, part or none of the amount against an invoice at a later date. However, some cards, so-called online cards, are blocked for offline purchases.
If the key actors in the card infrastructure were to increase the ability to pay offline, the resilience of the payment system would be improved. On the other hand, offline payments pose a credit risk to the payment recipient’s bank, as there is no adequacy check against the customer’s account.
Norway increases possibilities for offline payments
In 2022, Norway has strengthened its preparedness for card payments and also tightened the requirements for banks to have cash in reserve in case of disruptions in the digital payment system. The strengthened preparedness for card payments means that there is a better backup solution that allows offline payments at several grocery chains, pharmacies and petrol stations. With the new backup solution, card terminals in Norway can operate offline for seven days. Previously, the terminals would only work for a few hours if data communication were interrupted. Unlike Sweden, Norway has national payment cards and the national card network BankAxept. In Sweden, we only have international card networks and these are not as easy to regulate to provide extended offline payment possibilities. However, the Riksbank is holding discussions with the banks to review these possibilities.
Point-of-sale systems also need to work offline
Even if you have cash at home and a card that works offline, problems can arise when you have to pay in a crisis situation. For example, point-of-sale systems may be disrupted, preventing shops from taking payment from customers. In the summer of 2021, disruptions occurred with a supplier, among other things, of Coop’s point-of-sale system, forcing Coop’s shops to close for several days. To minimise vulnerability, critical sectors need to plan how they can accept payments even in the event that IT systems, power supplies or data communications fail.