The global chip shortage has been an eye-opening experience for the credit card industry. With 183 million Americans now reliant on credit cards, Visa, Mastercard, and Chase have seen a significant decline in production due to the shortage, leading contactless cards to fall down 20% in 2022. The inexorable chip shortage has caused delivery of new cards to take up to eight week.
Smaller credit card issuers are particularly vulnerable to the shortage, as they have fewer resources to prioritize implementation of chip technology and are thus further down the list in terms of receiving new chips. The Smart Payment Association has recently made it clear that the impact of the chip shortage will be felt through 2023, and cardholders may face prolonged wait times for new cards and updates.
Pandemic’s Influence on Contactless Payments
The COVID-19 pandemic has had a profound and far-reaching impact on how people pay for goods and services, with an increased adoption of contactless payments due to the convenience and security they offer. This increased reliance on digital wallets has exacerbated the existing chip shortage, as demand for electronic devices with chips, such as smartphones and laptops, has increased significantly. This has put pressure on the global supply chain for chips, hindering the production of credit cards and other technologies that rely on chip technology.
Investmentals‘ Mark Chew sums it up succinctly: “The pandemic juiced adoption of digital payment options.” Indeed, a survey by National Retail Federation revealed that 69% of retailers experienced an increase in contactless payments, and 67% of consumers are more likely to use them due to hygiene and social distancing concerns. This has led to more people keeping their cards at home, further contributing to the chip shortage.
The chip shortage had an especially haunting impact on the UK, where mobile payments adoption had already been increasing rapidly. By the end of 2020, nearly a third of the adult population was registered to use them, with over 50% of 16 to 34 year olds being registered, compared to only 11% of over 65s. This indicates that, despite the accelerating trend of mobile payments adoption, there is still some way to go in increasing uptake among older age groups.
Factors contributing to the shortage of credit card chips
The credit card chip shortage of 2020 has left a lasting impact on the industry. This shortage was driven by the transition from magnetic strip cards to chip-enabled cards, necessitating the increased demand for EMV chips. In 2021, 11.98 billion EMVCo chip cards were in circulation worldwide, a 10% increase from the previous year.
The production of EMV chips is an especially complex process that requires expensive and specialized equipment, such as chemical vapor deposition (CVD) machines. In addition, the limited number of companies that produce EMV chips, such as Infineon and NXP, creates a bottleneck in the supply chain. In 2023, the top three companies, Gemalto, IDEMIA, and Giesecke and Devrient, occupy 51% of the market share.
The COVID-19 pandemic has further disrupted the supply chain and caused delays in the production and distribution of EMV chips. Meanwhile, the global EMV cards market is estimated to reach USD 9488.7 million by 2028, with a CAGR of 3.7% during the review period. Credit card issuers have thus had to prioritize the distribution of chips to high-priority customers due to the ongoing shortage.
Chip Shortage Affects Bank Card Availability
Payment card manufacturers have warned that they may not be able to secure the chips they need, which could result in delays in producing cards for financial institutions. As a result, community financial institutions are being urged to work together to press their case to government officials and suppliers to get bank cards moved up on priority lists for chips as they become available. Institutions should inventory card needs, contact suppliers, and communicate with customers to gain a better understanding of the potential effects and plan accordingly.
What the Chip Shortage Means for your Wallet
The credit card chip shortage has contributed to an increase in credit card fraud, highlighting that 65% of credit and debit card holders in the US have experienced fraud at some point, equating to about 151 million Americans. The median fraudulent charge has increased by about 27% since 2021, leading to $12 billion in attempted fraudulent charges.
And, the chip shortage is expected to get even worse before it gets better and will continue to affect various markets, including the vehicle buying market, for at least the next year. Manufacturers are either stockpiling vehicles in need of chips or removing vehicle parts that require them to better ration chips, which removes features and functions that consumers want. As a result, the prices of used vehicles have gone up due to increased demand. However, all cars will eventually sell, and the flood of new old-stock vehicles will drive down demand for used vehicles, bringing down prices.
The Potential for a Shift Towards Mobile Payments
The recurring chip shortage has highlighted the need for the credit card industry to catch up with the rest of the world in terms of mobile payments. The technology already exists to do away with plastic cards and use smartphones and QR codes instead. Aaron Klein, a financial technology and regulation expert at Brookings, believes that America is behind the times when it comes to payment systems, and that the pandemic has provided an opportunity for change.
Jordan McKee, who researches financial technology at S&P Global Market Intelligence, believes that the sudden and enduring embrace of mobile payments could be a chance for the financial system to catch up with the rest of the world. However, until this happens, analysts predict that credit and debit card delays will continue throughout 2023. In China, mobile payments are commonly made through QR codes and smartphones, showing that the technology exists to make the payment system entirely different.
Strategies to Reduce Chip Shortage Impact
The ongoing chip shortage has left credit card issuers and financial institutions scrambling to find ways to mitigate its impact on their operations. Here are some specific steps they can take to minimize the effects of the chip shortage:
Prioritize high-priority customers: Given the limited supply of chips, issuers should prioritize their high-priority customers, such as those with high credit scores or who have been with the institution for a long time.
Increase communication with customers: Financial institutions should communicate with their customers regularly about the status of their card requests, expected delivery times, and any other relevant information.
Inventory card needs: Financial institutions should conduct a thorough inventory of their card needs and determine which customers need new cards urgently.
Work with suppliers: Institutions should work with their chip suppliers to ensure they are receiving the chips they need and to push their case for prioritization.
Consider alternative payment methods: As the chip shortage continues, credit card issuers and financial institutions should consider alternative payment methods, such as mobile payments, to reduce their reliance on physical cards.
By taking these steps, credit card issuers and financial institutions can minimize the impact of the chip shortage on their operations and ensure that their customers have access to the cards they need in a timely manner.
