While other advanced economies have embraced digital and card payments, Italy remains stubbornly attached to coins and banknotes. But far from being put off by Italy's long-running love affair with cash, fintechs say there is a major opportunity to grow their businesses there in mobile and card payments.

Cash is king

Italy is among the 35 most cash-intensive societies in the world, according to The European House Ambrosetti, a Milan-based consultancy. Cash as a proportion of GDP in Italy stands at 11.8%, putting it in the bottom two-fifths out of 95 countries analyzed for cash-intensity.

Cash dominates day-to-day economic life in Italy, making up 68% of transactions at point of sale by value, according to a 2017 research paper from the European Central Bank. This puts it roughly on a par with its Southern European peers Spain (68%) and Greece (75%), but contrasts strongly with trends in northern Europe, where cash makes up a mere 33% of PoS payments in Finland, 27% in the Netherlands and 29% in Ireland.

Italy's love of cash may be unusual for a developed economy, but from the perspective of a fintech company looking to expand, it is "a de-facto emerging market" for payments, Lorenzo Tavazzi, associate partner and head of the scenario department at The European House Ambrosetti, said in an interview.

"There are multiple layers of opportunity in Italy," he said.

Payment peculiarities

Despite heavy cash use, Italy's payments infrastructure is fairly well developed, Tavazzi said.

Its value chain of cashless payments is made up of about 1,600 companies, including fintechs, money transfer firms and payments companies, according to The European House Ambrosetti. Together, these firms have an annual turnover of €11 billion.

An Italian payments company, Nexi SpA, was among Europe's largest fintech IPOs in 2019, raising €2 billion in an April float in Milan — a move that industry pundits said they hoped would put Italy's relatively unloved fintech sector on the European map. Nexi is now firmly in expansion mode, having struck a €1 billion deal earlier in December to buy leading Italian bank Intesa Sanpaolo SpA's payments business, and with rumored ambitions to buy competitor SIA SpA

Italy's cash-heavy economy has given rise to some unique business models. SisalPay, part of Italian gaming and payments company Sisal Group SpA, gives customers the opportunity to settle bills and pay for online purchases by going to a kiosk or post office and paying in cash.

This model captured the attention of Intesa, which signed a deal with SisalPay in July this year to provide basic banking and payment services at SisalPay counters. Intesa has been under pressure to close branches to reduce costs, and CEO Carlo Messina said during the bank's latest earnings call that the providing some services via SisalPay rather than at branches could help with belt-tightening.

An ageing population, the predominance of small businesses and a deeply conservative approach to money (which, for many, includes an aversion to credit cards and consumer debt) partly explain Italy's attachment to cash, an analyst covering Italian financials said in an interview, speaking off the record.

Tax-dodging could also be a reason that smaller businesses push cash use, the analyst said.

Tax evasion is rife in Italy, where the VAT gap (the gap between expected value-added tax revenue and actual collections) stood at 25.9%, according to a 2018 study by the European Commission. By contrast, half of EU countries have a gap of below 9.9%, with Luxembourg having the smallest gap of just 0.85%.

But Alberto Dalmasso, co-founder and CEO of Italian fintech Satispay SpA, which provides mobile payments, also sees the predominance of cash as an opportunity rather than an obstacle.

Changing habits

Cash may be popular, but it has its limitations.

"You have to go to an ATM when you run out, it's not safe to carry large amounts of cash, it's not traceable, and it's not easy to remember when and where you spent it," he said.

Satispay, which was founded in 2013 and has just shy of 1 million users today, started out by providing telephone top-ups, then an app to pay car taxes. It then branched out into savings products and general payments. It is now preparing to launch in Germany (another market that has an unusually high level of cash use) and Luxembourg, Dalmasso said via email.

And as Satispay is preparing to crack the German market, German challenger bank N26 GmbH has ambitions to grow its market share in Italy.

The digital bank entered the market in 2017, and now has around 500,000 customers. It "more than quadrupled" its Italian user base during 2019, according to Andrea Isola, country manager of N26 Italy.

Cash has been popular up until now in Italy thanks to its sheer convenience, but consumers are becoming increasingly interested in tracking their payments in order to have a better degree of control over their personal finances, he said in an email. There is a clear appetite in the Italian market for digital banking and mobile payments apps that are "user-friendly and transparent," he said.

When it comes to preference for digital payments versus cash in Italy, the generation gap is not as large as one might think. Research by N26 shows that 35% of baby boomers prefer to pay by cash in store, compared with 30% of millennials and generation X-ers, according to recent research carried out by N26.

But Isola believes the younger generation are realizing the benefits of mobile and card payments, and that their habits are set to change rapidly from here onward.