Chip Shortage May Dent Supplies of Credit, Debit Cards

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The global semiconductor shortage could begin taking a toll on the secure payments industry, which relies on machines with chips and embedded chip cards to help retailers and consumers conduct transactions and access cash, industry experts warn.

Key Takeaways

  • The chip shortage has severely affected the auto and electronics industries, and now people are sounding alarm bells for the payments industry.
  • Semiconductors are embedded in more than a billion credit and debit cards and the machines that process them.
  • A disruption of the chip supply could mean many people may not get new payment cards or replacements for those that were lost or compromised. 

It’s well known that the world is facing a massive chip shortage, after pandemic closures squeezed semiconductor supply and led to increasing bottlenecks as the economy reopened. The automotive and electronics industries were hit hard, and now the embedded-chip credit and debit cards that have become so ubiquitous in everyday life and business might be, too. The security and ease of payment those cards enable depend on the continued availability of the chips, which is now in doubt.

“It is a real concern,” said Douglas King, payments risk expert at the Federal Reserve Bank of Atlanta. “Ten to 25% of payment cards could be affected. We are looking at a potential impact of 250 million cards. Also, point of sales machines have chips or readers for chip-on-chip transactions. Retailers and restaurants will need upgrades, and they are harder to come by because of the chip shortage. These could have a big impact in the payments space.” Chip-on-chip transactions are enhanced security transactions made with both an embedded chip in the payment card and in the reader, as opposed to transactions completed with a swipe card.

An industry trade group called the Payments Leadership Council says the semiconductor shortfall poses a serious challenge. “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 council said in a statement last month.

The payments industry includes more than 1.1 billion chip-enabled payment cards in circulation in the U.S. last year, accounting for almost 73% of transactions where cards were physically presented and used. Nearly 90% of non-cash consumer payments are made using cards in physical stores, according to the Smart Payment Association, an industry trade group, and payment cards are also critical for accessing cash. In addition, 40% to 60% of online payments are supported directly or indirectly by payment cards.

More than 3 billion chip-based payment cards worldwide are produced and delivered each year, including cards issued upon opening a bank account, a regularly renewed one after expiration, or one replaced in emergency after a card is lost or compromised. The chip supply bottlenecks have become severe because up to 75% of the world’s wafers—the necessary base to build semiconductors—are made in Asia, which has seen its own pandemic-related issues over the past year. 

That means payment card manufacturers are facing increasing difficulty obtaining the chips needed to produce cards, the payment association said in June. “That crisis is showing no sign of ending halfway through 2021 and will spread throughout 2022,” it added. 

Who Gets a Card and Who Doesn’t?

If the chip shortage becomes so severe that manufacturers don’t have enough for everyone who needs a card, financial institutions will likely be the ones to decide which consumers get one. The main criterion? Probably how much you use your card.

“This could create issues,” King said. “Who are those who are not active? Think of, say, that single mom working two jobs who uses a credit card for emergency purposes. That card might expire and not be replaced. She could lose access to that credit line if financial institutions have limited supply and active users get them. Those marginalized, who use a card for emergency purposes, could lose that ability if we have a limited supply and can’t reissue those cards at expiration.”

The Payments Leadership Council trade group warned that the shortage could hamper commercial activity and crimp the economic recovery, as well as the government’s ability to issue stimulus if needed. “As the federal government continues to integrate debit cards for social safety net payments and various relief programs, this shortage could have the unintended consequences of disrupting the disbursement of aid to those across the country,” the council warned. Last year, the IRS issued some stimulus payments using prepaid debit cards.

Security might also become an issue. “The possible shortage of chip-enabled cards also raises a host of safety concerns.” the council said. “Without chips, issuers may be forced to revert to issuing mag-stripe only cards, possibly reversing the gains achieved in fraud reduction in recent years and making consumer data more vulnerable.”

An ‘All-Hands-On-Deck’ Approach

In May, Commerce Secretary Gina Raimondo met with semiconductor industry representatives and urged legislation to help the government monitor supply-chain issues and gain the necessary tools to address them. (Congress introduced the CHIPS for America Act in 2020 to encourage companies to invest in chip manufacturing in the U.S. In June, the Senate passed the U.S. Innovation and Competition Act, which includes the funding for the CHIPS for America Act.) 

But the Payments Leadership Council last month called for more urgent action to ensure that payment cards are given high priority in the chip production process. “We need an all-hands-on-deck approach to the current chip shortage,” the council said. “As Congress and the Biden Administration continue to prioritize this issue and search for solutions, they cannot omit the impact this will have on the payments industry.”

In the meantime, “some of the large banks say they have an ample supply of chips, so they’re not worried,” King said. “But some of the smaller financial institutions without large inventory could be crushed. And we also have other payment options like cash or checks. But a lot of commerce has moved online too, and it’s more difficult to conduct business without a card there compared with at a brick-and-mortar store.”

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