There Are No Signs the Chip Shortage Is Easing, the U.S. Payments Forum Says

The microchip shortage that has plagued point-of-sale terminal makers since the onset of the Covid-19 pandemic shows no signs of abating. Despite forecasts that chip supply would not begin to start catching up to demand until mid-2022, terminal makers should continue to plan for shortages at least through 2023, according to a report from the U.S. Payments Forum.

Two problems that continue to hinder chip production are newer chip designs taking precedence over legacy designs and older, near-end-of-life chip designs, and the inherently long cycle for chip production. The further delay comes as chip manufacturers start to come back online after scaling back production or temporarily stopping production altogether due to shortages of workers and employee health and safety considerations

“Payment chips tend to be on older technology nodes – e.g., 40nm or 65nm – which is not where most foundries are currently investing,” the report says. The measure “nm” refers to nanometers; there are 25.4 million nanometers in one inch, says the National Nanotechnology Initiative, a U.S. government organization. “Moving to newer technology nodes (e.g., in the 20-30nm range) is a resource- and time-intensive exercise (including designing the chip, taking it to production, and getting various certifications – e.g., EMVCo, GlobalPlatform, payment networks),” says the report.

As a result, the chip shortage is challenging the servicing of legacy devices where any replacement depends on a chip design that may have a low production priority, according to the report.

Another factor hindering the availability of chips to the payment industry is that certain manufacturers outside the payments industry that rely heavily on the use of  chips in their products, such as auto makers, have lobbied hard to secure their supplies relative to other industries, including POS terminals and payment cards.

The constraints in chip production have led to about a 20% increase in production costs, adding further challenges to any net revenue or cost savings initiatives for manufacturers. “This issue becomes clear when looking at a secondary spot market for chips. It has been documented the premiums that chip suppliers in the spot and gray market channels are paid can be as high as 100% or higher over retail prices,” the report says.

To cope with the expected shortages, the U.S. Payment Forum recommends terminal makers consider several long-term measures. These include: reforecasting and increasing chip inventory for legacy products; considering new relationships with chip suppliers or increasing the number of relationships with chip suppliers; and increasing the use of virtual terminals.

“The chip supply challenge is expected to persist through 2023 and perhaps into 2024, the report concludes. “Careful management throughout the supply chain can help the payments industry to minimize this current challenge and associated disruption to the payments ecosystem.”