The global chip shortage – effects on payments

Anyone who reads the business pages cannot have failed to notice that the semiconductor industry has faced its fair share of upheaval over the past few months. The impact of this disruption on the automotive and consumer electronics sectors has garnered plenty of headlines, mainly related to production delays. But demand for chips affects a huge number of other industries – some of which have received little attention.

To recap, demand for chips has been growing over the past decade as an increasing array of devices, from cars and consoles to smartphones and smart meters, have required computing power to work.

Alongside this growing demand, trade disputes – think China and the US – and COVID-19 have added unwanted turmoil. Some companies ordered more chips than usual in 2020 as they hoarded them in light of pandemic-induced uncertainty over how long disruption to their supply chains would last, for example. Others cut their chip orders when the pandemic struck and were unable to order enough when demand for their products started to return. Overall, supply has not been able to keep up with demand, leading to a global chip shortage that has manifested itself in much longer lead times.

Increasing supply is not easy to do. Foundries, the businesses that manufacture chips, are reported to have been working at full capacity to try and keep up with demand but they take years and lots of money to set up. The end result is that consumers risk paying higher prices now or having to wait longer than anticipated for products that they wish to buy.

Although car, computing, and electronics manufacturers, along with telecommunications firms, account for the majority of global chip demand, there is a long list of other industries that also rely on them. Payment cards, for example, may not have the same ticket price as a Tesla or a PlayStation, but their importance to billions of people and businesses around the world make them a crucial cog in the global economy.

We need payment cards, and they need chips too!

Modern payment cards – so-called EMV^® chip cards – contain memory chips and microprocessors that store data and enable the card to interact with, for example, ATMs or card readers, such as point-of-sale (POS) terminals. Such cards are also required in order for digital payments to work.

There were 10.8 billion EMV^® chip cards in global circulation at the end of 2020, according to EMVCo, the organization that manages the specifications that enable card-based payment products to work together.¹

Their daily importance to consumers, banks, merchants, and a long tail of other ecosystem players should not be understated. Without payment cards, billions of people would not be able to withdraw cash. This is particularly important in markets where cash remains the dominant form of payment – in Japan, for example, cash still accounts for 54% of all transaction volumes.²

Payment cards are also crucial to completing contactless purchases or e-commerce transactions, or using mobile payment apps. Many online purchases require consumers to enter debit or credit card details, while a payment card is required in order to set up an Apple Pay or Google Pay account. In some cities, such as London, payment cards are also used to travel on public transport. Electronic and digital payments were already growing in popularity around the world before COVID-19 gave them an extra boost.

How banks can evaluate and mitigate the risks

The possibility that the global chip shortage will affect the payment card industry – which comprises card providers, issuing banks, merchants, payment processors, acquiring banks, card networks, and consumers – is real and concerning given that over 3 billion new EMV^® cards are issued every year.

For banks, in particular, there are three specific risks that need evaluating. First, a chip shortage could mean the inability to provide customers with new or replacement cards when required. Second, there is a potential revenue shortfall if payments cannot be made. Third, there is the reputational risk and the potential loss of existing or future customers to rivals.

To mitigate these risks, there are a number of things that banks should do. The most urgent is to carry out an audit of card-delivery needs to gain an accurate picture of how many will be required and when. Banks should discuss the results with their payment card provider to ascertain whether their needs can be met. Regardless of how that conversation goes, banks can use the current situation to look at opportunities to optimize existing processes, such as inventory management and card re-issuance. Finally, banks can raise the issues regarding the impact of the chip shortage on payment cards with banking associations, central banks, and governments. The aim here would be to ensure that the matter is front-of-mind with key stakeholders and that the industry’s needs are adequately taken into account when chip manufacturers are planning low chip volumes.

The benefits of working together

The global payment card industry, working together with banks, payment schemes, and local governments, responded well to the challenge of COVID-19 and can respond equally well to the chip shortage – however it plays out.

In particular, banks should work closely with their providers to ensure their customers get the service they require – and with their associations and regulators to put due pressure on chip suppliers.

Published: 14/06/2021