How the Global Chip Shortage Could Lead to Headaches for Financial Institutions

The global supply chain has drawn more mainstream attention over the past year than in generations – or perhaps ever. Supply chain issues have affected everything from shipping container shortages to automobile production to gaming consoles to, believe it or not, credit and debit cards.

A critical factor in most of the items previously mentioned is an ongoing shortage of silicon chips. Such chips are a building block for virtually all electronic products enjoyed by consumers worldwide.

We believe this supply risk should be on the radar of every financial institution, given the importance of keeping customers equipped with active payment cards. With effective planning, issuers can minimize the potential impact on their organizations.

A Ripple or a Tsunami?

According to ABI Research, 347 million payment cards worldwide had 2021 expiration dates. All of those cards needed to be reissued. This figure will more than double in 2022, to 740 million, at the same time delivery cycles are expected to lengthen further.

The relatively obscure role chips play in “critical infrastructure,” like payments, is gaining visibility in policy circles, which should eventually help with procurement prioritization. Nonetheless, it’s far from certain that supply will match demand on a timely basis. Fortunately, there are several steps financial institutions can take to manage the most-severe risks to customer relationships and payments revenue.

Let’s start with a few basics:

• Engage in ongoing dialogue with your vendors, who should be equipped to share solid insights on market dynamics and caution flags.
• Maintain a rolling 12-month forecast for card reissue volume; this information will prove critical internally and for vendors, as lead times for orders are almost certain to increase.
• Reach out to your card network before destroying any expiring inventory. Given the circumstances, Visa and Mastercard may be more inclined to grant extensions, allowing continued issuance from existing stock. This leads to a related note – not all chips are created equal, and some varieties are in shorter supply than others. Manufacturers tend to have more production capacity for the newer designs (e.g., dual interface, 40 nm or 65 nm), making it a good time to consider upgrading.
• Issuers may also consider prioritizing their renewals. For instance, some may elect not to automatically replace dormant cards without first engaging in outreach/reactivation programs. Given the increasing popularity of digital wallets, consider pushing card credentials directly into such apps – make it a game to determine who might happily live without plastic, perhaps offering customer incentives. It’s also an excellent time to experiment with a virtual card offering.
• Consider deferring early card replacement programs driven by new card designs or tactical rebranding.

Needless to say, any large-scale reissue programs should be carefully considered until further notice.

Other Worries for Processors

Silicon chips are not the only raw material that should be worrying processors heading into 2022. Other potential bottlenecks include resins, foils, and color cores. Bottlenecks in various supply categories have proven to be unpredictable, following the early outages in toilet paper and hand sanitizer.

Shipping times from suppliers and cardholders have become volatile, and FedEx and UPS have announced 2022 price increases. The potential impact of ongoing general staffing shortages cannot be overlooked, either.

The Bottom Line

We see the chip shortage as a “code yellow” issue for banks and credit unions, requiring close attention but not panic. Industry experts expect supply disruptions to extend at least through 2022, so we recommend careful planning, close communication with partners, and the continued exploration of new technologies that may reduce the need for plastic.