The Card Crunch

The chip shortage plaguing POS terminal makers is starting to inflict pain on payment card manufacturers. The forecast for 2022 is that the worst is yet to come.

It was only a matter of time before the semiconductor shortage plaguing manufacturers such as auto and computer makers trickled down to payment card manufacturers.

Nearly two years into the pandemic that triggered the chip crunch, payment card manufacturers are seeing lead times on orders stretch farther and further out.

The reason for the disruption in payment card production is the same as it is for point-of-sale terminal makers (“Out of the Chips,” September 2021): shortages of the raw materials needed make the tiny squares of silicon. Even if the chips can be manufactured and placed on a cargo ship, those ships can sit idle for days, even weeks, while waiting to be unloaded once they arrive in port.

Plus, there is no guarantee that, when finished product makes it onto the docks, a trucker will be available to haul it to its final destination.

And the shortfall in chip card production is only likely to get worse. Predictions are that chip availability will spiral downward this year and could potentially prevent the issuance of as many as 740 million payment cards globally, according to ABI Research. That’s more than double the 347 million cards that were at risk of not being issued in 2021, according to ABI.

What helped mask the card-production problems last year was that chip inventories were large enough for card makers to squeak by. But those stockpiles have dwindled substantially and are not being replenished as needed, according to payment-industry experts.

The combination of low inventory and constrained production capacity has raised concerns that chip manufacturers will be forced to tighten the allocation of chips to their clients even further. This scenario is a mounting concern for the payments industry, as the fluidity of the chip shortage makes it difficult for chipmakers to forecast just how many chips they can allot to their customers.

Also of concern to payment card makers is that chip manufacturers may opt to provide the biggest allotments to their biggest customers, such as mobile-phone companies and automakers.

“We’re seeing a lot of constraints in industries that use chips, such as the automotive industry, and that is not only raising concerns about chip allocation, its raising government awareness about chip allocation,” says Jason Bohrer, director of the U.S. Payments Forum and the Secure Technology Alliance. “How questions around allocation will impact the payments industry remains to be seen.”

Production Gaps

To help ensure payment card manufacturers get their fair allotment of chips, the American Bankers Association in November published a letter written to the Bureau of Industry and Security of the Department of Commerce regarding the adverse effect of the chip shortage across myriad industries, including payment cards.

In the letter, the ABA argues that, without adequate supplies of chips, payment card manufacturers could face production gaps that will make it difficult for financial institutions to issue replacement cards to existing cardholders, let alone cards to new accountholders.

“Given the importance of semiconductors to the payment card industry and broader economy, ABA believes that a whole-of-government approach is crucial both to weather short-term shocks to the supply chain and to formulate and implement a successful strategy over the longer term,” the ABA states in its letter, which was sent in response to the BIS’s request for public comment on the chip shortage.

The ABA went on to suggest the Commerce Department adopt an approach that treats all industries equitably, rather than give certain industries priority access to chip manufacturers and distributors in the United States and abroad.

“All American industries must be able to freely source needed supplies, including from foreign manufacturers, without obstacles that compound the underlying supply chain problem,” the ABA says in the letter. “In the near term, we hope that Congress will provide the Department with sufficient authority and resources necessary to aid U.S. industry. In the longer term, Congress should find a permanent, flexible solution to secure America’s domestic semiconductor production capability.”

While Commerce mulls what action, if any, to take to help alleviate the shortage, card manufacturers have begun altering their business model in response to the worsening shortage. Increasingly, they are favoring customers that commit to orders upfront with signed contracts. This contrasts with the pre-shortage custom of verbally placing an order, expecting it to be filled, then signing a contract later.

“Card manufacturers are now saying an order is not valid unless it’s accompanied by a signed contract,” says Adam Wahler, creative director for A2A Studio, a Stamford, Conn.-based graphic-production firm that includes payment card design in its portfolio. “It’s true supply-side economics.”

‘Money Talks’

Card manufacturers’ need to obtain firm, upfront commitments from buyers is being driven largely by lengthening lead time for orders. Pre-shortage, orders of about 1 million cards took 10 to 12 weeks, on average, according to payments-industry experts. Larger orders could take a few weeks longer. Today, cardmakers are quoting lead times of at least six months.

The delays have gotten so bad that manufacturers have taken to quoting those long delivery times in weeks, as opposed to months, because “24 weeks sounds better than six months,” Wahler says.

A2A is no stranger to navigating card production delays in the midst of a chip shortage. The company designed the Venmo card, which launched in October 2020, just as the chip card shortage was gaining momentum and spreading to myriad industries.

As part of its design work, A2A interacts with card manufacturers and chipmakers. In the case of the Venmo card, the studio worked with a chipmaker to create a custom chip with a “V” imprinted in the middle that did not interfere with the security features of the chip itself.

By working directly with a chipmaker to create a custom chip, which costs substantially more than a standard chip, order lead times were negotiated directly with the manufacturer. It also meant the order was a special order, separate from standard chip production.

“By ordering our own chip, we were able to get around some of the lead-time issues [for general chip production],” Wahler says. “When it comes to a custom card, longer lead times can be more palatable as long as the client knows they will get what they want in the end. In today’s environment, money talks.”

Shortages Are Wild

The roots of the chip shortage can be traced back to the economic fallout from the Covid-19 pandemic. As countries around the world began to close their borders in 2020 to travel and trade, delivery of the raw materials needed to produce semiconductor chips became almost non-existent. At the same time, many chip manufacturers temporarily reduced the size of their workforce or shuttered plants to safeguard their employees from the Coronavirus.

As factories began to reopen several months into the pandemic, supply-chain problems continued to delay delivery of raw materials and finished products.

“It’s not just the shortage of raw materials needed to make the chip that continues to hinder production, it’s also the shortage of other raw materials, such as plastics, needed to make cards,” says David Shipper, a strategic advisor for Aite-Novarica Group, a Boston-based payments consultancy. “There is a shortage of a lot of things right now. I’m even hearing of a paper shortage that could impact the availability of envelopes needed to mail out cards.”

Now that the calendar has flipped to 2022, cardmakers are bracing for a further tightening of chip supplies. Infineon Technologies AG, which manufactures chips for cards, says that the component continues to be in short supply, and that demand continues to outstrip supply by far.

“Many products are in allocation and inventories along the value chains are low,” an Infineon spokesperson says. “We do not expect the situation to normalize any time before well into 2022.”

To help weather the storm, Infineon says it has been working closely with its customers for about a year to optimize production to meet customer’s needs. The Neubiberg, Germany-based manufacturer adds it is also making investments to increase future production capacity.

“We have started production at our new 300-millimeter [plant] in Villach, Austria, and are increasing capacities at our [facility] in Dresden, Germany,” the Infineon spokesperson says. “This will enable us to meet the growing demand for semiconductors.”

While bringing more production capacity online can help resolve long-term supply issues, it can take years to build and bring a new manufacturing plant online, says the U.S. Payment Forum’s Bohrer. So any increase in future production capacity has to be weighed against how to manage current inventories and demand, he adds.

“We’re seeing a lot of constraints up and down the supply chain from raw materials to finished products, and there is only a finite number of chip foundries certified to manufacture chips for payment cards,” Boher says.

A Virtual Solution

Not surprisingly, the constraints chipmakers have faced throughout the shortage is increasing the cost of chips, as manufacturers can no longer absorb the increased production costs caused by the shortage.

“We have experienced tremendous increases in our own costs for raw materials and foundries, for example, since the beginning of the pandemic, and we had to pass on these additional costs to our customers after a certain timeframe,” the Infineon spokesperson says. “Our highest priority is to be a fair partner to our customers and suppliers.”

One potentially major issue looming over card issuers as the new year begins is whether card manufacturers will have enough inventory to replace expiring cards for the next 12 months. About 25% of all cards issued in the U.S. are replaced annually, according to Boher.

“One of card issuers’ biggest fears is running out of inventory,” says Shipper. “Besides annual reissuance, there are always circumstances that are not planned for, such as a massive reissuance due to a data breach.”

Two options card issuers have for keeping cards in the hands of consumers as inventories dwindle are to issue virtual cards or to encourage cardholders to embrace mobile wallets.

Virtual cards and mobile wallets are a way for card issuers, especially fintechs, to capture consumer spending even if they can’t get a physical card in the hands of a new cardholder right way. They are also popular with Millennials and Gen Zers.

The downside to these products is they are a temporary solution for consumers who prefer to pay with plastic, card industry experts say.

“Virtual cards and mobile wallets are a way to capture spend and retain customers while they wait for a physical card, but not all customers will be keen on using them, and many of those consumers will likely default to another card while waiting for their actual card to arrive, which means the issuer can lose business,” says Wahler. “Physical cards are not going away.”

And neither, any time soon, is the shortage of chips needed to produce them.