Payments 3.0: The Chips are Down. So Are the Cards

Wallets could be a lot emptier by this time next year, and it will have nothing to do with the spending capacity of consumers.

As Digital Transactions reported in September (“Out of the Chips”), a pandemic-driven shortage in computer chips is hitting the payments industry. Now, as cards expire, issuers might find it difficult to get new plastic into customers’ wallets.

The chip shortage has drawn attention from Congress, and there is the possibility that the federal government may step in. Industry sources tell me that card production requires a small number of chips in comparison with other products, so they are worried that cards will not get access to a fair share of chips. The risk is that the squeakiest wheels may get the most attention as everyone from the payments industry to auto manufacturers vie for a limited supply.

In the U.S. market in 2020, there were almost 1.2 billion chip-enabled cards in circulation, accounting for almost 73% of card-present transactions, according to EMVCo. The Federal Reserve’s 2019 Payments Study showed there were more than 131 billion card transactions in 2018, a number that has surely grown since the onset of the pandemic.

With this kind of volume running over chip-enabled cards, it is easy to see how even a minor disruption in the availability of chips, and thus cards, could hamper sales at retailers, restaurants, and anywhere else that accepts cards.

Consumers and businesses may also have a problem. With an ongoing coin shortage, it is not as though the economy can just flip to cash for all our commerce needs. Even then, cash would not help online sales, which, according to the Census Bureau, account for 13.3% of U.S. sales. The second quarter 2021 e-commerce estimate increased 9.1% from the second quarter of 2020, the Bureau said.

In the short term, the industry is looking for solutions, but even ideas that seem obvious have pitfalls.

Could providers just extend the life of cards by reprogramming the chips? Doing this would require reprogramming for merchants’ point-of-sale terminals and for systems at the issuer level. Additionally, issuers would need to find a way for cardholders to get their chips reprogrammed. The logistics alone are daunting, especially if consumers need to reprogram multiple cards. Also, this solution does nothing to address the problem of lost and stolen cards.

Will all this lead to a cardless future? One workaround would be to provision replacement cards to mobile devices or online wallets. That’s a possibility, but even now about one-third of merchants still do not accept contactless, according to a study from the National Retail Federation.

The payments industry does have some tools to navigate the crunch. It is taking stock and managing inventory by tracking it closely, ordering cards early to accommodate longer lead times (up to 36 weeks by some reports), and carefully assessing whether there are ways to extend the life of older inventory. Another tool for issuers is reconsidering the timing of events, like rebranding, that would require mass reissuance of cards. Finally, payments providers are recognizing that the law of supply and demand still applies. Accordingly, they plan to budget for higher chip prices.

Even so, if the federal government, or even manufacturers themselves, start to develop plans to allocate chips, they need to do so with a holistic view of the economy in mind. Merchants, product manufacturers, and card providers are interdependent. Any attempt to pick winners and losers when it comes to who gets the chips will result in everyone losing.

—Ben Jackson, bjackson@ipa.org