Chip Shortage May Dent Supplies of Credit, Debit Cards

The global semiconductor shortage could start to hurt the secure payments industry, which relies on chip machines and embedded chip cards to help retailers and consumers transact and access cash, industry experts warn.

It is well known that the world is facing a massive shortage of chips after the closing of a pandemic put pressure on semiconductor supplies and caused increasing bottlenecks as the economy reopened.

The automotive and electronics industries were hit hard, and now chip-chip credit and debit cards that have become so ubiquitous in everyday life and business can be too.

The security and ease of payment that these cards allow depends on the continuous availability of chips, which are now in doubt.

"It's a real concern," said Douglas King, a payment risk specialist at the Federal Reserve Bank of Atlanta. “Ten to 25% of payment cards can be affected. We anticipate a potential impact of 250 million cards.

Additionally, point of sale machines have chips or readers for chip-on-chip transactions. Retailers and restaurants will need updates and are harder to come by due to a shortage of French fries. This can have a huge impact on the payments space.

"Chip-on-chip transactions are security-enhanced transactions that are performed with a chip built into the payment card and reader, as opposed to transactions that are completed with a magnetic card.

An industry trade group called the Payments Leadership Council says the semiconductor deficit poses a serious challenge.

"While on the surface this may seem like a short-term supply chain disruption, the chip shortage has significant economic impacts on the US economy, including a disruption to the secure and near-instantaneous payments ecosystem that consumers expect and trust. " he said in a statement last month.

The payments industry includes more than 1.1 billion chip payment cards in circulation in the US last year, accounting for nearly 73 percent of transactions in which the cards were physically presented and used.

Almost 90% of non-cash payments are made with cards in physical stores, according to the Smart Payment Association, an industry trade group, and payment cards are also essential to access cash. Additionally, between 40% and 60% of online payments are supported directly or indirectly by payment cards.

More than 3 billion chip-based payment cards are produced and delivered each year around the world, including cards issued when opening a bank account, one that is regularly renewed after expiration, or one that is replaced in an emergency afterward.

that a card is lost or trusted. Chip supply bottlenecks have become serious because up to 75% of the world's wafers, the foundation needed to build semiconductors, are made in Asia, which experienced its own pandemic-related problems last year.

That means payment card makers are finding it increasingly difficult to obtain the chips needed to make the cards, the payments association said in June. "This crisis shows no signs of ending in mid-2021 and will extend into 2022," he added.

Who gets a card and who doesn't?

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

"This can create problems," King said. Who are the non-active? Take, for example, that single mother who works two jobs and uses her credit card for emergencies.

This card may expire and cannot be replaced. You could lose access to this line of credit if financial institutions limit supply and active users get it. The underserved, who use a card for emergency purposes, may lose this ability if we have limited inventory and cannot reissue these cards when they expire. "

The Payments Leadership Council trade group warned that the shortage could hurt business activity and undermine 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 aid programs, this shortage could have the unintended consequences of halting aid disbursements nationwide."

Security can also become an issue. "The possible shortage of chip cards also raises a number of security concerns." said the council.

"Without the chips, issuers could be forced to reissue magnetic stripe-only cards, possibly reversing the gains made in reducing fraud in recent years and making consumer data more vulnerable."

A "hands-on" approach

In May, Commerce Secretary Gina Raimondo met with representatives of the semiconductor industry and called for legislation to help the government monitor supply chain problems and get the tools it needs to solve them.

(Congress introduced the CHIPS Act for America in 2020 to encourage companies to invest in chip manufacturing in the U.S. In June, the Senate passed the U.S. Competition and Innovation Act, which includes CHIPS Act funding for the United States).

But the Payments Leadership Council last month called for more urgent action to ensure that payment cards are a high priority in the chip production process.

"We need a practical approach to deal with the current chip shortage," the board said. "As Congress and the Biden administration continue to prioritize this problem and seek solutions, they cannot ignore the impact this will have on the payments industry."

Meanwhile, "some of the big banks say they have a lot of chips, so they are not worried," King said. “But some of the smaller financial institutions, without large inventories, could be crushed.

And we also have other payment options like cash or check. But much of the commerce has also moved online, and it is more difficult to do business without a card there than in a physical store. "

We hope you enjoy watching this video about Chip Shortage 

Source: CNBC

 

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