FinTech waves Italian FinTech ecosystem 2020 FinTech waves – Italian FinTech Ecosystem 2020 1 Contents Research goals and methods 3 Executive summary 5 Update post COVID-19 8 1 Financial services trend 10 Global trends 11 Europe trends 13 Italian trends 16 2 The FinTech market 26 FinTech environment 27 Global trends 29 Europe trends 39 Italian trends 45 3 Italian FinTech ecosystem 53 4 The investor market 83 5 EY teams and Fintech District point of view – conclusion 113 6 Appendix 123 FinTech waves – Italian FinTech Ecosystem 2020 2 Research goals and methods FinTech’s gaining momentum. Let’s start with two simple facts about FinTech growth. First, if we look at the number of FinTech startups in Italy, there were 16 startups in 2011, 199 in 2015 and a total of 345 startups in 2019. Second, looking at the academic relevance, if we had searched the term «FinTech» on Google Scholar, we would have obtained 2,060 results in 2011, 4,630 results in 2015 and 18,300 results in 2020. Our goals. First of all, the aim of our research is to clarify the definitions of “FinTech” provided by different players over time. Our purpose is to provide a unique internal point of view on the Italian FinTech ecosystem by analyzing three different areas: Corporate Finance, People and Skills, Risk and Compliance. Moreover, at the end of this research, we will present our point of view on the current state of the Italian FinTech ecosystem and how it connects with the market trends of the Financial Services sectors. A complete and exhaustive research. Our research starts with the analysis of the Financial Services trends from a Global and European perspective, followed by an analysis of the Italian market. Further on, an analysis of the FinTech market, both as a world-wide phenomenon and with an emphasis on what distinguishes the Italian FinTechs, is provided. Additionally, our research presents a focus on the investor market, analyzing M&A and FinTech. Finally, we conducted a specific survey of the Italian FinTechs started between 2011 and 2019, in order to explore and navigate this emerging ecosystem. Scope of FinTech report Financial Services Trends FinTech Ecosystems (economic, financial and business) evolution Global Global Selected Europe Europe FinTechs Italy Italy Italian Survey FinTech waves – Italian FinTech Ecosystem 2020 3 Research goals and methods Setting the trends and giving our point of view. The outcome of our survey is based on the information provided by our analysis of Financial Services, the FinTech environment and M&A, in order to find out and explore the future trends of FinTech in Italy. Moreover, our survey provides insights about the Italian FinTech ecosystem, its current situation and what we expect for the future. Unity is strength. This research has been made by combining the knowledge of the EY teams dedicated to Financial Services and FinTech industries with the FinTech District’s presence in the FinTech community and its unique viewpoint of the ecosystem. Furthermore, our research and analysis are based on several reliable sources from the market and academics. Responses from the FinTechs. Plenty of research about the Italian FinTech ecosystem are available in the market, but very few of them have included a survey with responses directly from the FinTech startups. Consequently, one of the most distinctive elements of our research is our questionnaire submitted to the Italian FinTechs, from which we obtained precious insights about three different areas - Corporate Finance, People and Skills, Risk and Compliance. This is the added value of this publication which makes it unique in the market. COVID-19 out of a clear blue sky. The Coronavirus pandemic has shocked the entire financial ecosystem. It has forced businesses to rethink their operating models, and even the companies that were reluctant to change had to act fast to face the challenge of COVID-19. Process digitization has suddenly accelerated. FinTech services such as digital payments and alternative lending have had a remarkable boost. The Coronavirus pandemic has represented both a challenge and an opportunity for FinTech. In this document, we dive into the impact that the COVID-19 outbreak has had on the FinTech ecosystem. FinTech waves – Italian FinTech Ecosystem 2020 4 Executive summary The“ FinTech ecosystem will have room for “The quick recent growth of the Italian Fintech relevant growth only by applying a coopetition ecosystem should put it on the radar of investors approach within Financial Services to leverage who wish to get the best opportunities early. on open finance models with all players. Entrepreneurs with experience and track records Andrea Ferretti, are attracting talents, and it is just a matter of time for investments to follow. EY Partner, Markets & Business Development Leader for Financial Services and FinTech Leader in Italy Alessandro Longoni, Head of Fintech District Financial Services are focusing on cost optimization and operational efficiency... and the digital transformation? Financial players are facing new challenges from an array of non-traditional competitors, all while meeting greater demands for trust and transparency. Customers are changing; their needs and expectations are evolving, needing more customized and user-friendly services. Banks are consolidating, merging together to help reduce overcapacity, to enhance profitability and create synergies. The insurance industry remains stuck in low-growth mode because of low interest rates and weak economic indicators. Wealth Asset Management is rapidly changing because customers require holistically managed services. In this context, digital transformation could be a strategic lever to enable change. Italian trends are almost aligned with other European countries facing the major issues of Non-Performing Loans (NPL) management, recovery of profitability and IT system evolution The banking sector in Italy is in a rationalization and consolidation phase, mostly created by regulators. Banks are focusing on increasing efficiencies and revenues by renewing their operating model, reducing NPL exposition and digitalizing processes. However, modernization of legacy systems remains the first constraint in digital transformation activities. Insurers and Wealth and Asset Managers continue to grapple with low interest rates, rising competition, technological innovation and regulatory shifts. FinTech, the new phenomenon disrupting Financial Services The FinTech industry is characterized by organizations that combine innovative business models and technology to enable, enhance and disrupt Financial Services. Through digital innovation FinTech companies can offer services that are transparent, accessible, effortless and cost-cutting, tailoring products to the evolving expectations of new customers. New regulations such as the European PSD2 allow FinTech startups to flourish, boosted by their API-driven architectures which facilitate the compliance to the emerging Open Banking system. Global investments in FinTech firms (2016-2019) reach US$110b North America South America Europe 43 unicorns 3 unicorns 14 unicorns US$156.8b US$12b US$32.65b Asia Oceania 15 unicorns 2 unicorns US$223.5b US$2.4b FinTech waves – Italian FinTech Ecosystem 2020 5 Executive summary According to our analysis, the Italian FinTech ecosystem is heterogenous, small in size but with high potential From the survey we have conducted, most startups are in the intermediate stages of growth and have raised less than €1m. Analysis does not show a positive correlation between the year of foundation and the growth stage. FinTechs usually have small teams, with a median of 8.5 employees per startup. The top 20 FinTechs by funds raised have on average 1.8 founders per startup with an average age of 46 years per founder and that they are 100% male. 56% of the team members have an average age of under 32 years. From the hiring perspective, the most requested profiles, software and business developers, are also those considered as scarce in the market. With regards to the Risk and Compliance function, 74% of the startups fill the role and 51% spend less than €50k annually. The Regulatory Sandbox in Italy is considered important but it is not considered fundamental for foreign startups willing to enter the market. Break-down of Italian FinTechs by classification Crowdfunding (71) DNA, ML, AI (35) Smart Payments & Money Transfers (34) Lending (30) 2% 2% 1% 2% 3% 21% InsurTech (28) Crypto (21) 3% WealthTech (19) Cybersecurity (18) 3% 5% Capital Markets & Trading (16) Invoice & Tax Management (16) PFM (12) Chatbot (11) 5% 10% Open Banking Services/API (11) Neo Banks (7) 5% Blockchain (6) RegTech (6) Data Management (4) 6% 10% 6% 8% 9% The 5 largest segments represent 58% of Italian startups Italian landscape: Main investment sources: Company value multiplier*: FinTech → 6.73 x €700k Business 74% FinTech Angels TechFin → 4.34 x median funding B2B → 9.37 x per startup TechFin 26% Personal B2C → 4.10 x resources * Ratio between post money valuation and funds raised GDPR and PSD2 Lombardy For 81% of startups, are the regulations with has the male employees 53% the highest impact. highest account for more than presence of 50% of the whole team 92% are in favor of a startups of startups have less Regulatory Sandbox than 10 employees FinTech waves – Italian FinTech Ecosystem 2020 6 Executive summary FinTech received most of the investment across Europe. The Italian gap is narrowing Trends showed that investors' interest on early-stage startups shifted towards mid- and late-stage companies. In 2019, investments in later stage FinTechs reached the highest annual share of deals of the period 2016- 2019, while early stage financing declined to a 12-quarter low in 4Q19. The FinTech industry received most of the investments across Europe over the period 2016-2019, collecting 20% of the capital invested in the region. Although investments in the Italian FinTech ecosystem still lag behind other European and global environments, that gap started to narrow in recent years. Funding to Italian FinTech startups grew at a CAGR of over 60% from 2016 to 2019.