The italian FinTech ecosystem: an in-depth analysis of the ‘buy now, pay later’ market

FinTech, as the name suggests, is the combination of finance and technology (Gomber, Kauffman, Parker, & Weber, 2018). Of course, technology has always influenced the financial industry, with technological advancements (e.g., the introduction of ATMs or the use of wire transfers) changing how the financial industry operates (Arner, Barberis, & Buckley, 2015). The special aspect of the current FinTech revolution is that new technologies are being tested and introduced into finance more rapidly than ever before (Milian, De M Spinola, & De Carvalho, 2019). More importantly, much of this change is happening outside the financial industry, as startup firms and large, established technology companies are attempting to disrupt the incumbents in the sector, introducing new products and technologies and providing significant new competition (Gozman, Liebenau, & Mangan, 2018). Activity in the FinTech sector began with digital payments, credit, and investment platforms before spreading to the new world of blockchain, cryptocurrencies, and robo-advisers (Eickhoff, Muntermann, & Weinrich, 2017). Startup firms with high growth potential for innovative technologies are racing into the FinTech sector (Ashta & Biot-Paquerot, 2018; Chemmanur, Imerman, Rajaiya, & Yu, 2020; Gomber et al., 2018; Gozman et al., 2018; Puschmann, 2017; Schueffel, 2017). They are looking to fill the gaps in customer experience left by traditional firms by offering more rapid, convenient, and affordable financial products and services (Lee et al., 2021; Philippon, 2016, 2019). Within the evolving FinTech sector, ‘buy now, pay later’ (BNPL) is an emerging credit segment (CCAF, World Bank and World Economic Forum, 2022). This practice allows consumers to buy from preferred merchants and pay in equal, interest-free instalments, typically over six weeks. It rose to prominence through a period of rapid consumer spending on e-commerce platforms during the COVID-19 lockdowns , particularly during Black Friday and the holiday season (Berg et al., 2022). At this time, BNPL FinTech firms, mainly startups, launched various BNPL options, each with terms and conditions that enhance the shopping experience and capture a market niche (Guttman-Kenney, Firth, & Gathergood, 2023). Typically, these BNPL options are available at checkout and involve only soft credit without the need of a payslip; they are used for low-value purchases (under EUR 200) in sectors like luxury and fashion, beauty and apparel, and household goods (Cornelli, Gambacorta, & Pancotto, 2023). Therefore, BNPL options offer consumers a new way to access and utilise credit for purchases, adding to the plethora of options such as credit cards, instalment loans, and retail cards that have existed for decades (Akana, 2022; Alcazar & Bradford, 2021a; Di Maggio, Katz, & Williams, 2022; Johnson et al., 2021). However, the rapid expansion of BNPL options and their ill-fitting coverage under consumer credit law have raised concerns about potential harm to consumers, particularly about over-indebtedness and consequent defaults (Lux & Epps, 2022; Martin & Pizzonia, 2020; Milanesi, 2022; Soni, 2023). This issue has attracted the attention of academics, practitioners, and regulators, all of whom seek to better understand the effects of this new FinTech segment in the broader financial industry. This thesis analyses the FinTech sector and the emergence of BNPL business models, focusing on the Italian market through three separate research papers. Chapter 1 is an essential starting point. It comprehensively analyses the Italian FinTech ‘ecosystem’, applying insights from financial statement data from a sample of firms not subject to banking authority supervision. The analysis is conducted in aggregate form and across activity segments characterising the FinTech ecosystem from 2019 to 2021. These segments, identified according to a taxonomy of the Bank of Italy, are as follows: i) credit, deposit, and capital raising services (i.e., credit scoring, lending crowdfunding, and other solutions for credit, such as BNPL services); ii) payment, clearing, and settlement services (i.e., digital payments); iii) investment and asset management services (i.e., wealth- and investment-management and equity crowdfunding); iv) other related financial services (i.e., security, privacy, digital identity, open banking, and other FinTech-related services); v) insurance services; vi) market support services provided by technology companies to sector firms (called TechFin); and vii) multi-services firms engaged in more than one significant activity. This first study has two main objectives. First, by examining the financial statements of unsupervised Italian FinTech firms from a three-year sectoral perspective, the study expands the entrepreneurial literature on these firms. It analyses their profitability, capital structure, and solvency regarding the predominant activity segments in which they operate—an area that remains relatively underresearched (Carbó-Valverde, Cuadros-Solas, & Rodríguez-Fernàndez, 2022; MoroVisconti, 2023; Papadimitri, Pasiouras, & Tasiou, 2021). Second, the study provides policymakers and regulators with critical insights into the characteristics of Italian FinTech firms, given the potential interconnectedness of the FinTech ecosystem with the broader financial system. In this context, the study designs a monitoring tool for the Italian FinTech ecosystem, complementing insights from the Bank of Italy’s FinTech survey. This broad overview of the Italian FinTech ecosystem reveals the importance of BNPL business models in Italy. Chapter 2 is a systematic review of the literature on BNPL, employing frameworks proposed by Tranfield et al. (2003) and Xiao and Watson (2019). This study identifies the motives behind existing research, as well as emerging trends and any research gaps in this field. It presents a descriptive analysis and a review of the selected studies. This study is the first review of the literature on BNPL. Chapter 3 is a comprehensive analysis of BNPL business models in the Italian market. A survey-based methodology was employed to collect data from BNPL providers operating in Italy between 2020 and 2022. An analysis of these data led to the identification of two distinct BNPL business models in the Italian market: a FinTech model provided by an independent FinTech company (referred to as BNPL Type A) and an incumbent model offered by two established financial intermediaries specialising in consumer credit products (referred to as BNPL Type B). This study analyses and compares these models in detail, examining key service features, transaction trends at the point-of-sale, merchant sectors, revenue models, cost structures, funding sources, legal frameworks, and policy implications. Additionally, the study explores the demographic characteristics and adoption behaviours of Italian BNPL users, as well as the financial risks associated with each model. Finally, the research investigates how BNPL providers respond to ongoing challenges within the Italian market. This research makes several important contributions to the academic literature. First, it enhances the research on FinTech credit by offering new insights into BNPL services (Balyuk, 2023; Berg et al., 2022; Branzoli & Supino, 2020; Claessens, Frost, Turner, & Zhu, 2018; Huang, 2021; Jagtiani, Lambie-Hanson, & Lambie-Hanson, 2021). Second, it adds to the literature on the relationship between FinTech firms and traditional financial institutions by analysing the differences between BNPL FinTech and incumbent providers (Anand & Mantrala, 2019; Barba Navaretti, Calzolari, Pozzolo, et al., 2017; Rom¯anova & Kudinska, 2016; Thakor, 2020; Vives, 2017). Third, it extends the limited BNPL research by building on analyses of BNPL business models (Alcazar & Bradford, 2021a, 2021b; Cornelli et al., 2023; Johnson et al., 2021), demographic and behavioural characteristics of BNPL users, and the financial risks associated with BNPL use (Aggarwal & Kaye, 2022; Akana, 2022; Boshoff, Grafton, Grant, & Watkins, 2022; deHaan, Kim, Lourie, & Zhu, 2024; Di Maggio et al., 2022; Fook & McNeill, 2020; Gerrans et al., 2021; Guttman-Kenney et al., 2023; Papich, 2022; Powell, Do, Gengatharen, Yong, & Gengatharen, 2023; Wang, Pancras, Liu, & Houtz, 2022). Finally, this study adds to the literature on BNPL providers’ responses to the ongoing challenges in the Italian market (Gobbi, 2023) and contributes to the policy debate on BNPL services in Italy (Bank of Italy, 2022). Given the limited knowledge of the Italian BNPL market, it provides valuable insights for policymakers and regulators, highlighting the need for a comprehensive understanding and rigorous monitoring of the sector.