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How the chip shortage is impacting the payments industry

By Gaia Lamperti

June 15, 2022

  • Chip shortages
  • Digital Banking
  • FinTech
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Chip shortages have not only had an impact on the automotive and consumer electronics sectors but affected a huge number of other industries, among which the payments vertical.

Demand for chips has increasingly grown over the past decade and, alongside demand, came unwanted turmoil. The uncertainty caused by the pandemic, trade disputes between the US and China and now the conflict in Ukraine have disrupted the chip supply chain, eventually causing a global shortage.

“While on the surface this may appear to be a short-term supply chain disruption, the chip shortage has material economic impacts across the American economy, including a disruption of the secure, near-instant payments ecosystem consumers expect and rely on,” the Payments Leadership Council, an industry trade group, said in a statement last year.

Modern payment cards, also called EMV chip cards, use memory chips to store data and enable the card to function, interacting with ATMs ad PoS as well as during digital payments. For this reason, the current disruption in global chip supply is threatening the issuance of up to 740 million cards in 2022, according to ABI Research forecasts.

“The chip shortage has been an issue for executives for about a year now. But, if executives weren’t worried before, Russia’s invasion of Ukraine coupled with strict COVID lockdowns in China, are certainly reasons to refocus on this issue,” Ruby Walia, Senior Advisor, Digital Banking at Mobiquity, told IBS Intelligence.

“Ukraine is responsible for roughly 50% of the world’s access to neon, a critical component in chip-making. Other supplies of rare gases and materials, like Palladium, are also affected by the Ukraine conflict and the resulting embargo on Russia,” he added.

Chip makers have been stockpiling some of these materials since the start of the Ukraine conflict, Walia explained, which has helped mitigate the shortage to some extent. “But, as stockpiles run out and prices increase, a natural re-prioritization of which chips are produced will take place; driven by market economics, chip prices will go up and the supply chain will have longer delays. Moreover, adding insult to injury, China’s lockdowns have decreased total chip output by 5.1% in March. Truthfully, as you connect the dots, the monumental problems this shortage may end up bringing to banks/payment providers become quite clear,” he told us.

The daily importance of chips to consumers, banks, merchants, and a long tail of other ecosystem players should not be overlooked. In particular, EMV chip cards are critical in markets where cash remains the dominant form of payment, without those cards billion of people would be unable to withdraw cash.

There’s another issue that consumers will likely face, cyber-security risk. “Without access to chips, banks will not be able to issue chipped cards,” Walia added. “Chip readers are far more secure than card swipers, but without adequate chip access, we’ll be regressing in the security department – criminals rejoice. Generally speaking, access to cellphones, point of sale devices, and, of course, chip cards, will be, and already is, a serious challenge.”

This will impact business owners as well. “Say for example you’re a merchant who’d like to begin accepting new forms of digital payment to keep up with your local competition. With the chip shortage, that may simply not be possible. Truthfully, the only form of payment not impacted by this shortage is physical currency.”

“In the end, there is no one simple solution to this problem. But, the industry can protect itself from the chip shortage by accepting a mix of different payment methods (when possible), promoting the use of digital wallets (as they possess the same security features as chipped cards), or more simply, issuing cards with longer lives (later expiration dates). This problem is going to persist for quite some time, regardless of whether or not banks are prepared,” Walia concluded.

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