Lessons Learned From the Chip Shortage

Wide-ranging disruptions in microchip supply slammed the payments industry hard from 2020 to 2022. Now, are terminal makers better prepared?

Back in 2020 and 2021, terminal makers were scrambling to get their hands on the microchips they needed to power their devices. Lead times on orders had stretched to 18 months or longer, and some chipmakers were placing caps on order sizes.

Demand from other others industries that also relied heavily on the tiny pieces of silicon, such as auto, smart-phone, and electronic-device makers, continued to strain chip manufacturers’ ability to maintain inventory.

Further compounding the problem was the fallout from the Covid-19 pandemic. China, the largest chip-producing country in the world, had only begun to emerge in 2021 from a society-wide shutdown spurred by the pandemic that not only stopped chip production for months, but also prevented the necessary raw materials from moving between provinces.

The chip shortage was so dire, no one felt comfortable predicting when it would ease.

Now, we know. Chip inventories are more predictable, and lead times on orders are running about 12 weeks on average, shorter if product is urgently needed.

Despite the improving outlook for chip availability, though, terminal makers have still not ironed out all of their wrinkles in managing chip inventories. Lead times on orders, while significantly shorter than in 2021, are still not consistently at pre-pandemic levels. Plus, chip shortages continue around the world on a country-by-country basis, according to payments experts.

If nothing else, weathering the worst of the storm has taught terminals makers the need to pivot away from strictly making hardware reliant on chips. Instead, they’re developing more non-device-dependent payment solutions, such as mobile apps and QR codes with embedded payment capabilities, to be prepared for future chip shortages.

In addition, terminal makers have learned they need to be able to adapt off-the-shelf devices, such as smart phones and tablet computers, to act as POS terminals.

“The POS industry is undergoing an incredible transformation, largely due to the chip shortage, by moving away from terminal- dependent transactions to transactions that are not as device- dependent,” says Emmanuel Daniel, founder of TAB Global, a research and advisory firm.

“The industry was moving in this direction prior to the chip shortage,” he adds,” but the shortage forced terminal makers to reconfigure their business.”

SoftPOS to the Rescue?

The push toward more software-driven payment acceptance has been largely driven by independent software vendors (ISVs), which saw the growth in online and mobile payments as an opportunity to become full-service payment facilitators, also known as payfacs. In this role, they provide white-label payment-processing services and help sub-merchants process transactions through their master-merchant account.

“Software integrations give payment providers more options when it comes to acceptance,” says Jean Boling, director for ISV business development at Clearent by Xplor Technologies. “When the chip shortage hit, a lot of ISVs panicked and began looking at how to integrate their application to other terminal options, such as virtual terminals.”

Clearent was one such company. In addition to providing credit and debit processing, Clearent offers such options as virtual terminals and gateways for e-commerce, as well as electronic check and ACH processing. The company is also developing a payfac-as-a-service option that would eliminate the need for a physical terminal to accept payments.

“The goal is to be in front of payment technology, not behind it,” says Boling, “so that you are not limited to a specific device to accept payment should a major disruption like the recent chip shortage happen again.”

The move toward more software-driven payment acceptance has also sped up the acceptance of so-called softPOS, an application that allows contactless payment cards or digital wallets to be tapped on or waved at a smart phone to pay for a purchase.

SoftPOS technology is enabling independent sales organizations to equip small merchants, such as in-home fitness trainers and home-services providers, to accept payment on the spot using an off-the-shelf device.

Retailers are also turning to softPOS as a line buster, while restaurants are adopting the technology to enable payment at the table. Other merchants adopting the technology include food-truck operators, sellers at festivals or farmer’s markets, pop-up stores, and taxi drivers.

“The chip shortage definitely helped accelerate the adoption of softPOS,” says Sam Shawki, chief executive at softPOS technology provider MagicCube Inc. “There is a still a backlog of chips, and we see this as a big year for softPOS, especially in the United States.”

In January, Magic Cube signed a deal with Shift 4 Payments Inc. to make its iAccept softPOS application available to Shift4 merchants. The agreement is expected to give MagicCube access to new merchant categories in the U.S., such as restaurants, where Shift4 specializes.

MagicCube’s i-Accept app turns Android smart phones and tablets into PCI-compliant payment devices that can accept contactless payments using tap-to-pay with or without a PIN.

One reason Shawki is bullish on softPOS is that he has seen adoption alongside traditional POS terminals among merchants in Europe.

“The payments industry is slowly learning that dedicated terminals are not always necessary to enable payments,” Shawki says. “We can deploy our technology across existing devices such as phones and tablets more efficiently and cheaply than a dedicated POS terminal.”

New Devices, New Chips

Besides developing more software-driven POS devices, terminal makers also began moving away from older chip designs that were in high demand, especially among automakers. Instead, they leaned toward newer designs that could be produced plentifully as chip manufacturers in 2022 began to increase production.

That shift, however, meant redesigning terminals to accommodate the new chips.

“The chip shortage greatly impacted terminals that relied on older chip designs, which the auto industry also relies heavily on,” says Eric DuForest, chief operating officer for Ingenico, a longstanding terminal maker. “Newer chip designs are being driven more by mobile phones, so we are designing terminals around those chips. The more we move to terminals that use newer chip designs, the easier chip procurement becomes.”

Adapting its product line to newer chip designs that can be more readily procured wasn’t the only lesson Ingenico learned. Transparency and communication with customers played a key role in helping keep customers in the fold and is a strategy the terminal maker says it continues to practice.

“Being as transparent as we could be with customers about product availability and matching allocation of product to customer needs helped us maintain customer trust,” DuForest says.

“The players that survived the worst were the ones that told the truth to their customers and helped them find alternative solutions to weather the storm,” he adds.

Another lesson from the chip shortage is the need to place orders further in advance. “Being proactive in placing orders and commitments as far in advance as possible was key,” says Derek Webster chief executive and founder of payments-software provider CardFlight Inc. “When suppliers face a crunch, they will typically prioritize the orders on file for the longest.”

Proposing what-if scenarios, such as what if a supplier has no chips in stock, also helped payment providers and terminal makers weather the chip shortage, as it helped them plan for the worst.

“Being able to anticipate challenges further in advance makes it easier for all sides to plan accordingly and minimize any adverse impacts from delivery delays or other out-of-stock situations,” says Webster. “We were fortunate that we were able to avoid leaving any of our customers in an out-of-stock situation, but it took a lot of communication, partnership, and creativity to help meet everyone’s needs.”

Boosting Production

One big step to prevent future chip shortages was the passage of the Chips For America Act by Congress in 2022. The legislation requires the federal government to invest about $53 billion in semiconductor manufacturers and chip research and development, and in growing the workforce for the semiconductor industry within the U.S.

The aim of the legislation is to reduce the U.S.’s reliance on chip manufacturers in other countries should an unforeseen disruption to the supply chain occur.

“From a macro level, where the chips are produced makes a big difference,” says Jason Bohrer, executive director of the U.S. Payments Forum. “There needs to be a balance in where chips are produced.”

While the Chips Act will help boost domestic production of chips, it will take years for the additional capacity to be felt in a meaningful way, according to payments experts.

“New plants will have to be built,” says DuForest. “Nevertheless, investing in more chip production in the U.S. is a move in the right direction for the future as nobody knows what events will disrupt the supply chain down the road.”

Even with increased manufacturing capacity, payments experts agree that offering more non-terminal-based payment solutions will help soften the blow of future chip shortages. It could even expand payment acceptance among merchants by offering them more choices.

“Non-terminal-based solutions and contactless cards have helped free the industry from the problems caused by the shortage and add capacity to the payment system,” says Dan Coates, leader of strategic products at ACI Worldwide. “Merchants are recognizing that payments are critical to their business and that consumers are becoming more comfortable with non-terminal-based payment options.”

With the worst of the chip shortage over, payment experts agree there will still be lingering effects that cause temporary disruptions. As a result, payment-technology providers and terminal makers can’t afford to forget the lessons learned during the shortage, as no one can foretell when the next shortage or crisis will hit.

Says DuForest: “The goal is to be ready for the unforeseeable.”