PricewaterhouseCoopers (PwC), one of the leading professional and accounting service networks enjoying the Fortune 500 status, in collaboration with NetConsulting cube, delivered an insightful report on the state of Italian FinTech for 2020. According to the report’s findings, much needs to change for Italy to emerge as a leader in the FinTech sector.
FinTech and Italy: Old Culture with Old People
Did you know that Russia, the world’s largest nation by territory, has an economy that is merely equivalent to that of Italy, a nation that ranks 71 in territorial size? This just goes to show that proper infrastructure and talent pool far exceeds the importance of raw wealth that can potentially be extracted. One such emerging infrastructure is FinTech.
No nation on Earth has impacted the world so profoundly as Italy. In the absence of the legacy of the Roman Empire, it would be difficult to imagine how our present lives would look like. You could say that this very legacy and culture steeped in tradition makes Italy lag when it comes to FinTech. Still clinging to cash, Italy has one of the lowest rates of electronic payments in the Eurozone.
In this light, we must view the current state and future of the Italian FinTech sector, courtesy of PwC in collaboration with NetConsulting. Their 96-page report highlights the need for investments to spur Italy’s FinTech adoption and take advantage of the newly-established social distancing norms.
More Precise FinTech Division
Humans have learned long ago that proper classification of the entities we encounter in reality is key to forming a coherent thought that leads us to truer alignment with reality. Accordingly, we arrive at a higher level of precision if we further divide FinTech.
As you can see, Payments, Lending, Money Management, and Wealth & Asset Management constitute the bulk of the Italian FinTech sector. These subsections deliver the highest revenue, have the highest maturity, and have signed the most partnerships. Unfortunately, due to Italy’s unique cultural environment in which people are highly resistant to giving up cash, these companies are still plagued with negative EBITDA margin, a measure of a company’s operating profit as a percentage of its revenue.
Despite that, growth is still present in all areas, particularly in Payments (+10), Lending (+15), and Wealth & Asset Management (+11). Somewhat lower for Capital Market & Trading (+7) and Money Management (+5), while InsureTech (+2) and RegTech (+3) remain relatively stable.
Comparison with TechFin Reveals FinTech’s Immaturity in Italy
Unlike other businesses, companies reliant on high technology tend to be small, as many tasks are automated. For FinTech, this is especially true as 75% of them have less than 10 employees. Moreover, 60% of FinTech companies are no older than 5 years. As such, they still have low profitability, but experience an average revenue growth of +40%.
On the other hand, TechFin – the tech facilitators – are more mature. Consisting of 86 companies, 80% of TechFin supplies FinTech with software infrastructure, while only 20% deals with cybersecurity. Unlike FinTech, most of TechFin companies are older than 5 years, at 7 years average. The growth of TechFin is lower, at +17%, but they have a higher EBITDA margin of 10%.
Italy’s Generation Gap
As the coronavirus brought to light, Italy’s population is not just traditional but also old. Almost a quarter of Italy’s population is older than 65 years. This means that millennials (between 22 and 38) will have to take the charge in FinTech adoption.
Although lower than the global average of 64%, Italy’s internet users who take advantage of FinTech services are still respectable at 51%. For millennials, FinTech is a natural extension of the internet, while older customers require a push coming from their trustworthy traditional financial institutions. Instead of viewing FinTech as competition, such institutions would be well-served to integrate FinTech solutions into their offer, thus saving on costs and reaching the younger age bracket at the same time.
Such partnerships have already found fertile ground in Italy via FinTech District under Banca Sells, the Vittoria Hub specialized in InsurTech, and Nexi collaborating with Unicredit to develop a plug-and-play research center in Milan.
How can FinTech Develop in Italy?
Already starving in big investments, Italy’s health crisis, due to the aging population, compounded with the resulting global economic downturn. Nonetheless, a psychological barrier has been broken for many. As lockdowns ensued, people experienced first-hand the flexibility and convenience of FinTech services, such as MatiPay and SplittyPay. Keep in mind that the vast majority of FinTech companies have less than 10 employees, which spurs agility and lowers the operating cost.
Additionally, economic reckoning resulting from these lockdowns drastically increased the demand for easily accessible credit. Moreover, FinTech companies can more easily cooperate with government relief programs, as has been already demonstrated through Covid Credit in the UK and the Cares Act in the US.
No doubt, the average purchasing and payback power will go down significantly. In turn, this will slow the influx of capital, which was not that great to begin with. As a result, we can expect to see the growth of only the most agile FinTech companies in all of Italy, as they exploit the newly-opened frontiers of the digital space.
What do you think the future of FinTech looks like for Italy? What can be done to improve the situation? We want to know what you think in the comments section below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.