The global chip shortage caused by the post-Covid recovery and aggravated by Russia’s invasion of Ukraine is driving the bank card cost up
Bank cards are getting more expensive as the global semiconductor (chip) shortage is far from ending. There have been several increases in bank card prices over the last year. However, it hasn’t reached the peak yet. Disruptions in chip supplies will only intensify. The war in Ukraine is among the main reasons.
Chip shortage history
The roots of the current chip challenges date back to 2018. With the development of IoT and the omnipresence of smartphones, semiconductor manufacturers began allocating more supplies of automotive components like MCUs to other industries. This wise relocation of resources became a problem in late 2020. Customers motivated by low interest rates and generous stimulus cash created an unexpectedly high demand for cars.
The COVID-19 pandemic started the chip shortage with the long-term shutdown of factories. Furthermore, its long-reaching effects, including labour challenges and geopolitical uncertainties, have propelled the disruptions of the global supply chain. Meanwhile, post-Covid economic recovery fuelled the extreme demand for various consumer goods. Never before was there any higher need for semiconductors.
Connected devices in all industries are pushing demand for complex semiconductors (microcontrollers, microprocessors, etc.). In particular, a few segments are forcing the current spike: IoT and 5G, smartphones, and the automotive industry (especially EV).
As for the banking industry, contactless card use has increased as well. Globally, in the first quarter of 2020, there was a 40% growth in contactless transactions. Most of them occur via bank cards with embedded chips emitting electromagnetic waves. Today around 3 billion cards are issued annually, and the total number of cards in use exceeds seven billion.
Analysis from the Smart Payment Association (SPA) concludes that the global chip shortage will continue throughout 2023, severely impacting the delivery of payment cards worldwide. Without an adequate chip supply, some payment card issuers could face challenges in production and the timely replacement of chip cards. Payment card issuers are also suffering from delays in delivering basic raw material supplies such as plastic, metal and other components of a smart card.
Some predictions are even gloomier. Intel CEO Pat Gelsinger told CNBC that the overall semiconductor shortage may continue into 2024 since the scarcity has affected factory equipment too.
The closure of Ukrainian companies slashed half of the global neon supply
Since Russia’s full-scale invasion started, most industries in Ukraine have stalled. According to Reuters, two Ukrainian companies, Ingas, based in Mariupol, and Cryoin, based in Odesa, shut their doors when the war started. Surprisingly, these two firms produced half the world’s supply of neon, a key ingredient in making chips.
Azovstal, the besieged and partly destroyed steel plant in Mariupol, also has a unique value. It is one of a handful of global facilities capable of producing the materials needed to cost-effectively make noble gases such as neon, krypton, xenon and helium, which are critical for global manufacturing.
Neon is required to control the specialised lasers they use to make semiconductors. According to the South China Morning Post, the average wholesale price of industrial-grade neon in China has skyrocketed nearly nine-fold since the invasion began. Uncertainty around helium supply — another noble gas needed for semiconductor manufacturing — is also rising along with its price.
Currently, Mariupol is under the control of the occupying troops. Even if the production is restored, Russia won’t let Ingas supply neon to “unfriendly” Western countries. Odesa is under frequent shelling. Therefore, Cryoin managers are worried about the possibility of the destruction of the plant and transport infrastructure. Besides, most of its employees are male, and many have joined the army since the war started.
How expensive will bank cards be?
Industry research firm Nilson Report forecasts prices for finished, first-use plastic cards to increase between 5% and 20% this year and next year. In 2021, it took about $7 to issue one plastic card. The average selling prices for chips have increased between 10% and 20% in 2022. With the scarcity of raw materials, the cost is expected to go higher by the end of the year.
The cost itself is only part of the equation. Whether card issuers will be able to fulfil their commitments is another question. About 80% of the card market is about the re-issuance of expiring cards. Existing customers are likely to get their cards on time due to the predictability of the needed quantity. However, quick expansions of financial institutions to new markets would not be seamless. If bank customers suddenly decide to increase a card order, they will have to wait much longer for chip deliveries.
Experts advise ordering new cards 4-5 months ahead of the usual term. Card issuers also have to design and implement risk mitigation strategies. These might include robust inventory management, optimal utilisation of available stocks, greater forecast accuracy, delay of re-design and promotion activities, and enhanced collaboration with respective suppliers to reduce impact.
Some legislative efforts in both the EU and the US aim to prioritise the supply of chips for the banking industry. The governments understand the need to invest in domestic chip research and manufacturing. The European Chips Act and the US “CHIPS for America Act & FABS Act” explore the possibilities to strengthen this critical industry and bring competitiveness to the market. Nevertheless, restructuring the whole supply chain might take years.