December 12, 2019

The startups killing Italy’s cash economy

Italy is still a predominantly cash economy, which presents a challenge to Europe's fintech startups such as Qonto and N26 trying to conquer the market. What's their plan?

Italian shop

Faisan runs a convenience store in the heart of Trastevere, a vibrant medieval district that runs along the banks of the Tiber in Rome. His shelves stock alcohol, snacks, canned fish, at least a dozen permutations of spaghetti. It’s all very convenient. Except for one thing: he only takes cash. 

Italy is predominantly a cash economy. Research shows that around 86% of payments made throughout the country are settled in cash, versus 28% in the UK. ATMs, or bancomats, abound, many nestling in the doorways of stores like Faisan’s. Only the more upmarket vendors — supermarkets, designer clothes shops, tourist traps — offer a cashless reprieve.

This all poses a struggle for the various fintech startups who would like to see Italy join their online banking networks. If your stock-in-trade is electronic payments how do you make inroads into a country that shuns technology? 


“There is a little bit of a lack of trust in digital payments,” says Andrea Isola, the general manager at the Milan branch of N26, one of a new generation of 'challenger banks' that are working to oust cash. “People are afraid of losing their money in online transactions. Cash gives them more physical control — if they’re paying online there’s not a lot of control.”

Part of the reason for this fear — that, once dispatched, digital cash will literally disappear into the void of the internet — is that Italians have a longstanding mistrust of institutions, fuelled by decades, if not millennia, of corruption. The pitch from fintech startups like N26, then, is, “don’t trust them; trust us”. 

One solution is to accommodate, not disrupt, the cash economy. N26, for instance, has devised a workaround called “CASH26”. Embedded as a feature within N26’s online banking platform, CASH26 offers a way for customers to deposit and withdraw cash from the tills of registered vendors. A user simply hands the cash over to a compliant shopkeeper and manually logs the transaction in the N26 app (or vice-versa, for withdrawals). Sprinkle in some QR code wizardry and hey presto your cashier is transformed into a human ATM.

Thus a thing as prosaic as physical money is exposed to the “full digital experience”, says Flavio de Laurentis, the country manager of Viacash, which has rolled out the service across 200 franchises of the Pam supermarket. De Laurentis says that there have already been between 15,000 and 30,000 users so far, many of them millennials eager to digitise cash gifts from older relatives. 

CASH26, of course, also presents a lucrative business opportunity, and charges 1.5% on deposits exceeding €100. But compared with the 4% fees charged by some point-of-sale terminals (not to mention the running costs inflicted on the vendors themselves) that’s a steal. 

“Imagine a credit card transaction — but with cash,” says de Laurentis. “You can offer a better service to customers with a lower cost to serve.” 

Indeed, cutting costs could be the way in. Italy’s sluggishness on digital payments is partly due to its boundless enthusiasm for red tape, which can whip up large overheads and strangle innovation. “Doing business in Italy has a higher bureaucracy cost,” says Gareth Horsfall, a financial advisor at the Rome office of Spectrum IFA, a consultancy. 

This “bureaucracy cost” — the layers of expenses that come with owning real estate, complying with regulations, managing human resources — is one of the reasons Italy’s cash economy persists, says Horsfall. That’s why even basic checking accounts charge customers monthly, and Italian banking giants like UniCredit and Intesa levy high fees on their point-of-sale devices. Under these circumstances cashless living is hard to justify. 

“Why would I accept credit card when there’s a bancomat right outside?” says Faisan, the shopkeeper. 

Qonto, a French fintech, has pursued a strategy of undercutting these fees, and has already had some success in Italy’s business to business (B2B) market (in Italy businesses are compelled by law to file invoices electronically to prevent fraud). Over the past six months, the company says, its Italian operation has handled €72m in transactions and won over upwards of 300 customers, similar to its pull in France.


Transacting via a bank or a traditional point-of-sale device can run up “tons and tons” of fees, says Mariano Spalletti, Qonto’s country manager in Italy. Online banks, on the other hand, “don’t have to sustain costs like real estate”, he says. “We don’t have to charge customers with high fees.(A friend recently signed a rental agreement and was advised by the agency to pay in cash, to skirt the 15% VAT charge).

At the periphery of this fintech skirmish on the Tiber also looms American giant Amazon, which has its own plans to conquer Italy: a service called “Amazon Cash”, which enables consumers to refill their Amazon balances at high street retailers. This service — along with prepaid debit cards, whose one-time use appeal has made them the only thriving form of digital cash in the country —could help quicken the onset of a digital economy.

C.R.E.A.M, for now

Still, there’s a long way to go. Isola says that uptake of CASH26 has been far slower in Italy than in its two other proving grounds, Germany and Austria. As of today there are a mere 200 registered vendors in the country via the partnership with supermarket giant Pam. And even while digital payments are enjoying a slight uptick, Italy remains a laggard, coming 24th out of 27 in a ranking of the most digital payments-savvy countries in the European Union. 

One source of assistance is the Italian government, which, according to Horsfall, blames cash for a more pernicious evil: tax evasion. At least €3bn was lost to tax evaders in Italy in the past year, compared with £1.7bn (€2bn) in the UK. While cash isn’t the sole cause of this, it does play a significant role. “Cash payments are not visible to the government,” says Horsfall. “Whereas any digital payment is traceable.” On paper Italy has one of the most promising welfare states in Europe — alas, it seems few people can be bothered to fund it. 

Now the government is on the prowl for experts who can help it achieve its vision of a cashless economy. From this it has effectively formed its own fintech startup, pagoPA, a state-owned company whose proprietary technology — also called pagoPA — brings both public and private payment providers under the purview of a single, electronic service, making it easier to file taxes and pay fines. Giuseppe Virgone, pagoPA’s chief executive, says the digital service is on course to generating 50m transactions by the end of 2019 and will be a “driving force towards the digitisation of payments in Italy”.

PagoPA places great emphasis on the boon its service could bring to law and order. A successful implementation of pagoPA, says Virgone, would “allow the state to monitor all transactions related to the public sector so as to have access to a real and immediate view of its revenues”.

Another initiative comes from the legislature. Earlier this year the government lodged a bill to reduce tax on certain digital payments, while levying extra taxes on cash withdrawals. Payments made through credit cards, debit cards and bonifico (online banking) would be eligible for a two percent VAT discount. Cash payments would generate a 1% increase. A 2% tax would apply to ATM withdrawals exceeding €1,500. The bill, although not yet passed, is a source of hope for people like Isola, who believe it’s high time for some top-down economic innovation in the country. “We’ll support it, for sure,” he says. 

Might this dual-pronged assault on cash stimulate Italy’s tech sector and inch the country, slowly but surely, toward an approximation of modernity? If not, there’s always Italy’s flourishing bartering economy

Ben Munster in Rome

Ben Munster is based in Rome and writes about Italian tech and startups for Sifted. He tweets at @Ben_Munster