Northern Italy has been a financial center in Europe since the 15th century when the first European banks were founded in Florence and Siena. After the industrial revolution, Milan overtook Florence as the country’s financial capital, and today, Milan is home to the headquarters of about 170 private banks, plus the Borsa Italiana, Unicredit, and much of Intesa Sanpaolo banking group. There are over 70,000 people employed in the financial services sector in Milan. In recent years, the city has also developed a vibrant fintech scene. In 2019, there were over 110 fintech companies founded or headquartered in the Milan metro area.
A recently released report by Endeavor assessed the strengths and weaknesses of the fintech entrepreneurship community in Milan to provide recommendations for policymakers who support local fintech entrepreneurs. The report is based on more than 60 interviews with fintech founders in Milan, as well as interviews with investors and support organization leaders. The analysis also utilizes secondary data on the investment rounds, exits, and work histories for an additional 113 fintech firms and 169 fintech entrepreneurs in the city.
A crisis in the banking sector opened up unexpected opportunities for fintech entrepreneurs in Milan.
The fintech sector in Milan emerged out of the Italian banking sector’s prolonged crisis following the Eurozone’s financial recession. Most Italian banks slashed their innovation budgets, executive bonuses, and salaries. Around the same time, European legislators passed regulation that fundamentally altered the playing field for fintech entrepreneurs. Fintech companies were now allowed to make payments on a consumer’s behalf, but without being subject to the registration requirements and regulations of traditional banks.
The banking crisis, coupled with the changes in European regulation for payments were enough to convince many banking experts to spin off from their banks and start their own companies. Over 80 fintech companies were founded in the five years between 2014 and 2019, and the sector tripled in size. Former bankers were well positioned to start fintech companies because they were grounded in the inefficiencies of the Italian financial markets and knew which issues could be addressed with technological solutions. In 2019, Endeavor Insight identified 113 fintech companies founded or headquartered in the Milan metro area. Together, these companies employed over 1,300 people.
Fintech founders tapped into unique traits in the Italian economy.
Fintech companies in Milan tapped into a number of traits and inefficiencies in the Italian economy. Italy is a country of small and medium enterprises, most of which struggle with constant cash flow problems because payments take on average 80 days, according to official government data. Italy is one of the most cash-based economies in Europe — 85 percent of point of sale operations still take place in cash in Italy. Northern Italy has one of the highest concentration of private wealth in the world, and high-net-worth individuals have played an important role both as consumers, and as investors in the fintech sector.
Milan needs more fintech companies to scale, but significant challenges remain in the sector.
While the number of new startups has virtually exploded in Milan over the past five years, entrepreneurs continue to face significant constraints to growth. Among the estimated 113 fintech companies in the sector today, only 5 percent employ more than 50 people, and none of these companies were founded in the past 5 years. The largest companies like Moneyfarm and Satispay employ slightly more than 100 employees.
According to fintech founders in Milan, there are a number of significant challenges that make it difficult for fintech companies to grow in the city.
- Access to non-financial talent. There is an abundance of banking talent in Milan, but there is a shortage of tech skills and a shortage of people with past experience in growing a company. Milan companies also have to compete with growing European tech hubs like Amsterdam, Berlin, and Madrid.
- Access to capital. Most fintech companies’ services in Milan are focused on solving inefficiencies in the Italian economy. Local exit opportunities to sell a fintech company or go public are limited. As a result, most foreign and Italian venture capital investors have been cautious to invest in fintech companies in Milan.
- Compliance requirements. Fintech is heavily regulated in Europe. In addition, Italian regulators need to translate European rules into Italian legislation, but it often takes a long time. The uncertainties involved in this process are debilitating for many fintech companies that are in the process of developing new products.
- An absence of mentorship and angel investment connections between founders. Previous Endeavor Insight research indicates that certain connections between founders like mentorship and angel investment from an experienced founder can make a measurable difference in a founder’s ability to scale. These connections are extremely uncommon between founders in Milan.
There are a number of opportunities to help more fintech companies scale in Milan.
Milan has a number of great assets that will help the sector grow: it is a city with world class cultural amenities, a robust public transportation system, a highly educated, meritocratic, and trusting population, and a lot of local wealth, as explained in detail in the study. Decision makers can lean on these strengths, and in the meantime, listen to local fintech founders, and address the challenges they reported. This can be accomplished by channeling resources to the founders with potential to scale, fostering relationships with international investors, growing tech talent and managerial talent in the community, and leveraging existing entrepreneurship networks to foster angel investment and mentorship connections.
To access the original study, please click here.
Contributed by Lili Torok.