Banking Article, Banking Finance 2023, Banking Finance January 2023

Global Chip Shortage and its rippling effect on Banks

The 2020–21 global chip shortage is a crisis in which the demand for integrated circuits is greater than the supply, affecting more than 169 industries and has led to major shortages. Global shortage of these tiny, essential microelectronics that make so many things smart and connected like cars, homes, electronic devices, and home equipment.

This global shortage of chips is now threatening to imperil the supply of another pretty indispensable item: the payment card that we use every day to make certain cashless transactions. These cashless transactions gained more popularity in Asian countries  during COVID-19,  due to contact less payment requirements.

Root Cause of Shortage

The semiconductor market’s issues began with an abrupt surge in demand last year for devices to keep us entertained and working remotely during the pandemic, but the pandemic forced chipmakers to shut operations last year. By the time they reopened, they had a backlog to fill. Thus created a wide demand supply gap. Thus various industries have been hit by major shortages such as PCs, laptops, mobiles, tablets, gaming consoles, but especially automobiles. Equipment manufacturers had to delay their production lines as there was not an adequate supply of chips. The impact on many industries are covered widely on various platforms but in coming days the world will see major effect on Banking Industry as well.

Impact on Banking Industry

  • Every time a bank account opens, a payment card has to be issued; they also have to be renewed regularly after their expiration date and replaced in an emergency if they get lost or compromised. Chip-based payment cards are designed to prevent fraudulent practices such as card skimming and cloning with enhanced safety features. Our old credit and debit cards store our data on the magnetic stripe found on the reverse side of your card. This makes it easy for a fraudster to copy the data when we swipe the card. Chip-based payment cards, in contrast, store our data on a microprocessor chip embedded in the card.This means that the card generates fresh user data every time you transact.
  • The Smart Payment Association (SPA), the trade body for the cards and mobile payments industry, three billion payment cards are produced and delivered around the world every year. Payment cards are used for 90% of non-cash-based transactions, and up to 60% of online payments are also supported by the precious plastic boards, including digital wallet solutions.The SPA has warned that the bottlenecks that are currently hitting the production of semiconductors is trickling down to some payment card manufacturers, who are facing difficulties securing the components they need to produce the items.
  • Disruption in global chip supply can halt the issuance of up to 1bn payment cards over the next 18 months, with 347m cards at risk of not being issued in the second half of 2021 and up to 740m in 2022 because of “significant chip shortages”, according to anABI Research forecast.
  • This Chip shortage is going to impact Internet services that helps Banking Industry to provide better customer service, as of 2020 nearly 1.9 billion individuals worldwide actively used online banking services with that the number forecast to reach 2.5 billion by 2024. Broadband providers are seeing delays of more than a year when ordering internet routers, becoming yet another victim of chip shortages choking global supply chains and adding challenges for millions chipset vendors, some of them tell me that they have something like overbooking of 300% of their capacity.
  • SIM cards industry is also feeling the heat as vendors are confronted to semiconductor vendors allocating less chips than they need, thus jeopardizing their production, leading to extended lead times and growing costs. Also, the SIM card industry is evolving towards an increasing proportion of eSIMs, making forecasting even more difficult than before. This will impact mobile banking services.The number of mobile banking payments across India in fiscal year 2019 accounted for approximately 6.2 billion. This was tremendous increase compared to the previous fiscal year.
  • Apart from above impacts the loan repayment cycleis also going to tumble as manufacturing industries which uses Chip are cutting down there productions. Recently Mahindra & Mahindra said,” the company will be observing about seven ‘No Production Days’ in its automotive division plants in September, 2021, which is estimated to result in reduction in production volumes of the division by 20%-25%. The revenue and profitability will be impacted in line with the fall in production volumes.Thus the loan repayment will adversely get effected in addition to COVID-19 impact.

Why Can’t we just produce more chips?

Indeed, semiconductor manufacturers have already announced investments in expansions and new factories that will increase supply. But those projects won’t be completely finished until the end of 2022 at the earliest.

In that time, demand might fall and the immediate shortage might ease. “Just when the new factories come online, there’s all this excess supply and then prices collapse and no one wants to build another factory for a while.”

This dynamic can create a disastrous cycle for the industry: When suppliers stop building new factories, demand gradually grows until it falls in line with supply. At that point, small shifts in consumer demand can once again create big shocks to the supply chain.All this means that chip suppliers need to carefully plan their expansion, or else they risk producing a semiconductor glut in the next few years, which could be followed by another shortage.

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