How Should Payment Card Ecosystem Players React to the Chipset Shortage?

It has been well documented that the semi-conductor industry is currently going through a high level of uncertainty. Driven by recovering economies as well as the continued upward trajectory of hyper-connectivity and subsequent requirement for computing power, the demand for chips is expected to exceed all expectations in 2021 and it is already clear that supply cannot currently keep up with increasing demand.

COVID-19 is partially to blame, thanks to increased orders for computing devices to work from home and gadgets for entertainment purposes. This was alongside the 2020 downfall of the automotive industry, where OEMs significantly reduced their respective chip orders, leading the foundries to retune fabrications to supply other in-demand chip types. In addition, Huawei added to the pressure by increasing their orders for stockpiling purposes in reaction to the U.S. and China trade war.

The automotive and consumer electronic segments have done a great job at educating the market, bringing their expectations related to the chip-set shortage and how it will impact them and their customers moving forward to the forefront. Having said this, the chip shortage will not be limited to these two markets alone, and impacts will be felt across all industry segments, payment cards included.

Although not necessarily getting the coverage it deserves nor the support from governments, payments cards are a critical enabler for global economies, both from a consumer and enterprise perspective. Access to payment cards is required in order to digitally transact and buy in both the physical and digital domains on a day-to-day basis. On top of this is the potential disruption to GDP. If payment cards are not available, then this will directly translate into less purchases, which will ultimately have a detrimental impact on GDP.

As a result, the market needs to understand the chip shortage and potential implications to help industry stakeholders better prepare and strategize in order to minimize and mitigate any associated risks and impacts. All ecosystem players, from secure integrated circuit (IC) and smart card vendors, acquiring banks, and processors to payment networks, issuing banks, and merchants, are in the same boat and a collaborative effort is required across the entire value chain to help manage the industry, through what could be a difficult period.

ABI Research has conducted extensive research into the potential impacts of the chip shortage. For further qualitative and quantitative analysis related to the expected impact of the chip shortage on the payment cards market, please visit ABI Research’s recently published The Impacts of the Chip shortage on the Payment Cards Market (PT-2522)  Application Analysis. The below bullet points outline some of research’s top-level findings:

• It is already clear that the 2021 demand will not be met, and deliveries of payment ICs will likely be less than what was achieved in 2020. This impact is set to continue into 2022, as demand is expected to remain at a high level and as order backlogs are honored.
• In addition, prices are going to increase, significantly. Supply and demand economics are defining the price rises, and the pricing power has fully shifted back to the secure IC vendors/foundries. The chip market, at least in the shorter term, should not be considered a seller's market.
• Although the impacts of the chip-shortage have not been visible to date, this will significantly change in H2 2021, with the impacts on H1 minimized, thanks to the use of existing stock to help counter the shortfall in supply.
• The leading secure IC vendors and foundries active within the payment cards market are adopting different chip-shortage approaches and strategies, such as targeting/prioritizing specific market verticals and/or regions, reducing capacity in certain end markets (such as payment card ICs), and reprioritizing others higher margin opportunities or even scaling back and opting out of lower end/lower margin opportunities.
• It is already clear that foundries are prioritizing new/higher end technologies and applications that yield a greater margin. Unfortunately, payment cards are not considered an economic priority. This will directly lead to markets such as payments suffering as foundries look to divert manufacturing capacity towards higher-value chip sets.
• All secure IC vendors and foundries are looking towards the qualification/development of new fabrications in the face of supply restrictions and the vast majority have outlined their respective plans to invest millions in order to expand capacity, but this should be considered a mid/longer term solution.
• Despite the potential impacts from a volume perspective, the reduction in supply will be somewhat offset from a revenue perspective as the higher value dual interface cards continue to gain momentum (alongside ASP increases) in the post-COVID world. Although volumes may decline, absolute revenue value will not be as severely impacted.

The way in which ecosystem players react will ultimately be defined by the level of impact sustained. Having said this, below are ABI Research’s top recommendations:

Where possible, issuers should look to prioritize the replacement of expired cards over new cards if supply is constrained. Where possible, new cards should be issued in a digital first approach, with new clients offered a virtual card variant with a physical card being issued as and when it becomes available. This will help reduce the likelihood of an issuer not being able to replace expired cards and will provide continuity to existing banking client bases.

In any instances where issuers are unable to replace an expired card, an issuer may have to adopt a prioritized replacement strategy. This would likely result in issuers focusing attention on more profitable segments of their respective client portfolios, but majority risks marginalizing certain customer segments. A different prioritization strategy linked to payment card form-factor is another possible approach. For example, historically, the debit cards market has not been considered a great line of business for issuers and they may wish to focus issuance attention on credit, where the risks and rewards are far greater.

Strategies which reduce reliance on single IC vendors and/or foundry should now be in full swing. Striking new supply deals and adopting a multi-sourcing policy will be key in mitigating any future supply problems. Having said this, it may take months to implement, if not years, and should be considered a mid to longer term solution.

All ecosystem players need to work together to help better ascertain the higher levels of demand. Critical questions—such as what percentage is being driven by issuers wishing to secure future stock and could this be managed by ensuring a priority-based supply strategy—need answering in order for suppliers to better focus their attention on issuers with more depleted stock levels.

Issuing banks should use the chip-set shortage to audit themselves and use that as an opportunity to streamline processes related to inventory management and card re-issuance. For the next 12–24 months, card hoarding MUST be minimized and closely monitored and managed.

Although the payment networks are not in control of chipset manufacture, they do have a significant role to play, particularly as it relates to certification. With that said, the payment networks should be working towards a short-term simplified certification process to help speed up capacity increases, with certification labs considered one of the market’s great bottlenecks.

Finally, transparency will be key! Clear communication, education, and close collaborative work will be required to best navigate this turbulent time. So far, communication from the leading chipset vendors and foundries has been holistic and top level in nature. More specifics and detailed information, related to price increases and expected supply lead times, is required, and needs sharing with the wider industry to help build supply confidence and to avoid panic buying/mass stocking scenarios.

For further qualitative and quantitative analysis related to the expected impact of the chip shortage on the payment cards market, please visit ABI Research’s recently published The Impacts of the Chip shortage on the Payment Cards Market (PT-2522) Application Analysis.