By Ray Birch
RANCHO CUCAMONGA, Calif.—Problems from the microchip shortage are now knocking on the doors of credit unions, and some may not have been ready to address the matter, says Co-op Solutions.
The company is reporting that chips for payment cards have joined in the shortages affecting automobiles, home appliances and a range of other goods, and are hampering CU’s ability to reissue new plastic.
One result could be a greater long-term focus on digital card issuance.
“Supply chain issues continue to severely impact chip shortages, which means it’s getting more expensive to reissue credit and debit cards. Some major issuers are pushing out their reissue dates from the typical three years to five,” said John Patton, senior portfolio advisor with Co-op SmartGrowth Consultants.
Patton told CUToday.info chips for payment cards have been an issue for the last 18 to 24 months.
“It’s just another phenomenon of the pandemic. These chips are often produced at plants in Asia and in the Pacific Rim, which have tended to shut down production to fight the pandemic,” explained Patton. “This has led to shortages and supply chain issues.”
An Ongoing Variable
How difficult has this issue become for credit unions? Patton said it varies.
“I’m working with different credit unions today that want to issue new cards and they’re having difficulties in getting card stock due to the chip shortage,” he said. “It's becoming a bigger deal, because most credit unions typically have a three-year recycle and reissue period. That’s become the standard.”
Complicating matters, Patton said, is many credit unions simply did not see the problem coming soon enough.
“I don't think credit unions have been thinking about this issue as much as they should have,” he said. “I think we've heard so much about chip issues, and we don't even think about our own cards. Everybody's talking about the chips in the computers, cars, refrigerators… But credit and debit cards have got the same issue. We just have had it under the radar because we haven't really had to deal with it yet, but it's starting to show up in business card engagement. And I think we're going to see a fast run to address it. With the advent of EMV cards, all credit union issuers are susceptible to this issue.”
Many Questions, Few Answers
What is most troubling about the shortage is there are no answers about when production will return to needed levels.
“Nobody really knows. It’s all connected together in production, whether its phones, computers, automobiles or credit and debit cards,” explained Patton. “They all need chips, even though they are different kinds. In my understanding, it’s an issue of getting those chips so they can be programmed. You need enough chips in and out of the production cycle, then they have to go to a provider to program them and, ultimately, ship the cards.”
The shortage is leading to a greater focus among CUs on digital issuance, said Patton.
“At Co-op, we are working with our credit unions to get their digital issuance set up so that they can start to transition members from physical cards,” he said.
What to Consider
Credit unions should be considering extending their reissue cycle to five or even six years, recommended Patton. “By extending the expiration cycle, credit unions can save costs in three ways. They don’t have to buy the cards. They don’t have to program them. And, they don’t have to mail them.”
John Patton
“The three-year cycle was often based on the durability of the physical card. Now, we’ve moved to mainly tapping or waving cards at a point of sale. And, users are often loading these cards in their favorite merchant, like Amazon, so, there’s no physical contact at all,” he said. “Younger generations of users are all about using their phone to pay for things. The card is not being used physically, it's being used in a digital way.”
Another change is also taking place, explained Patton: many credit unions managing the expiration date has shifted to a “fraud play,” reissuing cards because the card has been compromised.
He added he believes credit unions are becoming more comfortable with an extended reissue cycle.”
Complicating the whole scenario, Patton said, is that credit unions tend to be very focused on the relationship with the member.
A (Good) Complication
“So, they may tend to have a shorter reissue cycle simply because they want to have that touch point,” Patton said. “Here’s where it is truly important to know your members and have good data that can tell you about their spending behavior, which can be applied to automated reissuing decisioning systems. You could have a member that you leave on a three-year reissue cycle—perhaps they have had some fraud activity in the past. With another member whom your data tells you is transacting digitally and not swiping the card, you could extend the reissue cycle. Again, It's a great opportunity to move that person to a longer reissue cycle, and you’ve taken some of the cost out of running your card program.”
Keeping the credit union’s card top of wallet is the primary concern with whatever steps the cooperative takes as chips remain in short supply.
“There are studies that suggest if you give somebody a longer-term card expiry, that gives the member the feeling that they are important and different, and the member will actually be more engaged with you,” Patton said. “By reissuing cards at a longer interval, it says both member and credit union are comfortable with the longer relationship. That is very meaningful to them and the credit union.”
Additional Strategies
Other strategies can be employed, as well, to keep members swiping the CU’s plastic, according to Patton.
“There are times you will want to reissue a rewards card to remind the member they have this opportunity or if the credit union is in the middle of a card program rejuvenation,” he said. “That's another opportunity to use that reissue tool to say that these are the accounts I want to reissue, and others I want to move to a longer expiration cycle. And, this can also address the problem of chip shortage.”
Reissue timing can be very targeted to specific accounts or card types or what the credit union’s individual offerings are, based on the relationship.
Patton said the situation is both a problem and opportunity.
“One of the things we look at at Co-op SmartGrowth is the way the card is being used—is it being swiped, dipped or waved? Those are really the three ways in addition to card on file,” he said. “We don’t have problems with the chips themselves. The lifespan of a card is really aligned to that magnetic stripe that's on the back, not the chip, because that is a physical touch experience where you swipe. If you use that card enough times, it'll lose its magnetic messaging and it'll get a fail.”
Time for a Review
Patton said it’s time credit unions look at their portfolio of members and see how they are spending to see where expiration dates can be extended, resulting in a cost savings.
“The three-year reissue cycle is the standard today, but the chips themselves are very durable. You could put a hammer to a chip and nine times out of 10 it would still work,” Patton said. “Extending reissuing will actually help expedite individual card reissues when they need to be replaced unexpectedly, because you have the time and resources to address these situations. You are also contributing to transitioning members to digital issuance, making members less dependent on physical cards.”