How the Chip Shortage Is Prompting Payments Players to Adopt a Variety of Workarounds

After more than two years, payments providers are still reeling from the chip shortage. Indeed, lead times for chips used in POS terminals and credit cards can be as long nine months, compared to six months a year ago, says Stewart Watterson, a strategic analyst for Aite-Novarica. Pre-pandemic, lead times on orders were about 12 weeks.

Stiffer competition for the tiny pieces of silicon from automakers and cell phone manufacturers, both of which are willing to absorb higher prices for chips to keep their plants operating, is contributing to those longer lead times. So are slowdowns in chip production due to strict Covid-19 health protocols designed to protect factory workers in China and the Asia-Pacific region, where many chip manufacturers are located. Add to that limited production in the United States, Watterson says.

Not surprisingly, the shortage is wreaking havoc in the payments industry. Manufacturers of PIN-entry devices (PEDs) are experiencing order leads times that are four to six times what they saw pre-Covid, Amit Chhabra, director of product management, for ACI Worldwide Inc., says by email. The lag in PED deliveries is prompting merchants and payment service providers to adopt alternative card-acceptance technologies. These include commercial off-the-shelf devices that can be converted into a card reader, such as Android smart phones equipped with an NFC reader. Other alternative POS technologies that are gaining traction include PIN-on-glass technology.

“Merchants can use an Android smart phone loaded with a Soft PED application to conduct a contactless payment transaction,” Chhabra says. “Android smart phones are more readily available and traditionally more cost-effective than purpose-built PED alternatives.”

The lingering chip shortage, which many industry experts expect to last into 2023 and possibly even beyond, has also strengthened the case for real-time payments, which do not require PEDs to conduct a transaction, Chhabra says.

“Typically, a real-time payment transaction is completed using the consumer’s mobile phone with a feedback loop from the payment-processing system to the merchant’s point of sale, indicating the transaction was completed from the consumer’s smart phone using a real-time payment method,” he adds.

To help merchants cope with the chip shortage and adapt to the changing payment-terminal landscape ACI Worldwide Inc. is focusing on offering commercial off-the-shelf (COTS) and real-time payment solutions to merchants, Chhabra says.

With the chip shortage also hindering production of chip cards, financial institutions are pushing digital-wallet adoption to consumers, just as payment providers are pushing digital-wallet acceptance to merchants, since digital wallets are natively cardless, Ram Puppala, chief technology and operations officer at ACI, says by email.

“To combat the hardware issues that are presenting themselves, cellular-phone providers are exploring redeployment of NFC technology that allows phones to accept tap-and-go payments,” Puppula says. “Likewise, banking applications are also adopting business-payment acceptance within their device apps.”

The rising cost of chips due to the ongoing shortage has exacerbated the cost of issuing a credit and debit card, which is helping fuel the move toward digital-wallet acceptance. “A chip is one-half to two-thirds the cost of a chip card,” Watterson says. “When you spread a cost increase across millions of cards in an issuer’s portfolio, chip cards can start to become cost- prohibitive. That’s why we are starting to see expiration dates for chip cards extending beyond the typical three years. The chip shortage is going to continue for some time and its effects will continue to ripple across the industry quite possibly beyond 2023.”