How the global microchip shortage is affecting the payments industry
- While chip-based payment cards face the biggest threat, experts say the only aspect of payments immune to the shortage is physical currency.
- As banks look to address the problem, one of the solutions being discussed is extending payment cards' expiration dates.
With the Covid-19 pandemic, the global semiconductor supply chain took a significant hit. Buying microchips became more expensive as cycle times increased. As video game makers, smartphones, and automobile manufacturers evaluated where they stood, the payments industry found itself no less immune.
China, the world’s largest chip manufacturer, went into a series of lockdowns as part of the country’s zero-Covid policy. This resulted in the closure of factories and a drastic decrease in output. China’s lockdowns decreased total chip output by 5.1% in March this year. Additionally, the Russian invasion of Ukraine has made half of the world’s supply of neon, an essential ingredient in manufacturing chips, inaccessible.
The chip shortage has now dragged into its second year, and firms are knee-deep in trouble. In January, a U.S. Department of Commerce survey found the median inventory levels of chips at U.S. companies down from 40 days in 2019 to five days in 2021. Furthermore, the median demand for chips was found to be 17% higher in 2021 than in 2019. This is a major supply and demand mismatch, the department concluded.
The modern payments industry’s most prolific product is the payment card. Most of these cards now use an EMV chip, which stores the holder’s information and enables communication with other devices, like ATMs and POS terminals. So, the bottom line is, as chips are getting difficult to source, cards are getting difficult to produce – and banks don’t like that. After years of getting in the habit of freely making and sending out cards, they are being forced to predict and budget their production.
“Banks can certainly account for and budget their chip use for customers with expiring cards, but of course, you cannot plan for human error. If a customer loses their card, they immediately need a replacement,” Ruby Walia, senior advisor for digital banking at Mobiquity, told Tearsheet. “However, with the chip shortage, that may not be possible.”
“Frankly speaking, the only aspect of payments that can avoid this issue is physical currency.”
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