By Alessandro Hatami, managing director of strategic consultancy Pacemakers

Buoyancy and Italian banking do not often go hand in hand. And yet in my third year of chairing the Milan Fintech Summit and despite the grim global financial outlook, what struck me was a pervasive feeling of optimism and opportunity.

Italy is the third largest economy in the Eurozone but historically it has lagged behind much smaller countries in developing its digital banking presence.

Smaller countries such as Spain, The Netherlands and Sweden have a better track record in funding startups, creating unicorns and adopting FinTechs. This is poised to change. First indications seem positive; in fact the adoption and growth of FinTech in Italy is having a real impact on the economy.  According to ItaliaFintech, the national FinTech association, loans to Italian SMEs provided by FinTechs have increased 4.4x between 2020 and 2022.

There are three reasons for this new found sense of buoyancy:

1. The rise of a native FinTech ecosystem

Until recently,  the Italian FinTech ecosystem was dominated by foreign players. Italian entrepreneurs often felt that in order to breakthrough they had to leave the country. Two of the most successful Italian FinTech founder CEOs – Giovanni D’aprà CEO of Moneyfarm and Francesco Simoneschi of Truelayer –  are both based outside Italy.

This perspective changed dramatically this year with two domestic fintechs Scalapay and Satispay breaking the Unicorn ceiling. Scalapay is an innovative BNPL proposition and Satispay is a payment company.

These two firms are challenging BNPL giants such as Klarna and PayPal with propositions that are lean, attractive and eminently exportable. Their success is the tip of the iceberg of a market in transformation. Fabrick (part owned by Sella Group), one of the sponsors of the MFS, is another interesting example. Fabrick describes itself as connective tissue, a platform that makes access to innovative financial services providers simpler, quicker and cheaper.

Other banks are also growing their VC commitment; Intesa Sanpaolo , Italy’s biggest bank has reinvigorated its Neva Finventures early stage tech VC with an investment of €250m announced earlier this year, explicitly saying that it aims to invest in Italian startups. Enrico Resmini is the CEO of CDP Capital (the VC arm of Cassa Depositi e Prestiti, the country’s third largest bank). Resmini maintains that Italian VC investment in 2021 was double that of the previous year and he thinks VC investment in 2022 will  maintain a similar pace.

2. Regulation is more Fintech friendly

Banca d’Italia is one of several Italian bodies that oversees financial regulation and it has changed its attitude towards FinTech. The bank has created three new services that allow entities such as corporate innovators, entrepreneurs and start-ups to establish a dialogue with the bank of Italy. These are:

Canale FinTech:  which operates as a hotline where any interested third party can seek the regulator’s view on a specific proposed innovation. Canale FinTech doesn’t offer legal advice or regulatory approval but insight on where to look for an answer.

Milano Hub: contrary to its name the hub serves the whole country and potentially companies operating outside Italy, too. Innovators can submit a new proposition to Banca d’Italia. If the Bank accepts the proposition, the innovator has the opportunity to join the Milano Hub to shape the idea into a more tangible proposition. Banca d’Italia will then contribute its own internal specialist to the project team (and can also reach out to academia). This joint team will work to shape the proposition and iron out potential issues. Upon leaving the hub, the idea is ready to be incorporated into a new financial proposition or a startup. In 2022, 60 pitches were submitted by  startups, incumbent banks and academic projects. Of these, ten were accepted.

The Sandbox: This is a proposition similar to those offered by many regulators across that globe, where businesses with innovative ideas can benefit from one-to-one engagement with the regulators to shape their offering before launch.

These three initiatives are supported by a changed attitude and tone from Banca d’Italia and most of the other regulators. Rather than defending the past they are now keen to support innovation that seeks to make the future less daunting.

Other financial regulators are also stepping up their activities reflecting a striking evolution in the attitude towards more disruptive financial technologies. For example the Organismo Agenti e Mediatori (OAM), a supervisory body in Italy that maintains lists of financial agents, has been tasked with creating a registry of crypto exchanges allowed to trade in Italy. They have been busy. While regulators are often criticised for delays in processing applications, the OAM has added 73 crypto firms – including the ones listed above – to its new roster for virtual currency service providers, despite only opening in May 2022.

3. Increased VC Investment

The success of the new Unicorns and of the fintech sector at large, has been supported by the substantial growth in venture capital investment in Italy. Even if VC investment still lags behind many other European countries, it is growing fast.

VC funding in Italy has already hit $1.7B this year and is projected to grow 64% year on year, while European investment overall is down approximately 9%. Q3 2022 was the most active quarter ever for venture capital funding in Italy. Even then Italy still has a lot of unfulfilled potential: When it comes to the amount invested per capita,  Italy is 24th behind the UK, Germany and France but also trailing much smaller economies such as Estonia and Iceland.

But Italy is also the third largest economy in the Eurozone and 10th largest worldwide and its citizens’ use of digital technology is very similar to their UK, French and German counterparts. As regulation changes, startup success stories increase and digital adoption continues, growth in Italian VC investment suggests that investors (both domestic and international) are realising that Italy represents a promising opportunity for Angel, VC and PE investment.

Support for entrepreneurs is also growing. New startup ecosystems are rapidly emerging. Groups like Talent Garden, Fintech District, LVenture, Digital Magics, Fin+Tech, UniCredit Start Lab to name a few, have created bespoke spaces where startups can build their businesses. These incubators and accelerators are appearing across the country, enabling entrepreneurs to work together, find mentoring and even secure investors.

The State is also stepping up. In July 2022 the  The Italian Ministry of Economic Development announced that crypto projects will qualify to apply for up to $46 million in government subsidies. As part of the Italian government’s aim to invest in technology and innovation, companies and research firms will be able to apply for funding.

Final thought

The acceleration of Italy’s financial digitalisation, kicked off by the pandemic has transformed the way entrepreneurs, Investors, banks, regulators and most importantly customers see the potential of the FinTech revolution.  Despite the looming recessionary downturn caused by the war in Ukraine, we will see more successful fintech firms and a greater number of unicorns emerge from Italy. I’d even put money on it.