Technology investments by major Italian banks lag behind their European counterparts, the central bank warned on Friday, urging lenders to boost spending to drive innovation in financial services.

While Italian banks have quadrupled their tech investments since 2017, they remain limited, said Fabio Panetta, governor of the Bank of Italy, in remarks at the unveiling of the central bank's annual report.

"They need to grow: it would be a grave mistake to continue falling behind in this area," Panetta stated.

Banks with a stronger digital presence can better diversify revenues and gain market share in lending, he added.

Italy's largest lender, Intesa Sanpaolo, aims to spend €5 billion ($5.4 billion) on technology from 2022-2025 as it transitions to a cloud-based core banking system successfully tested at a new digital bank.

UniCredit, Italy's second-biggest bank which outsourced its IT infrastructure a decade ago, targets tech spending of €2.8 billion between 2022-2024.

In contrast, Spain's largest bank Banco Santander announced plans in 2019 to invest around €20 billion in digital and technology initiatives.

The Bank of Italy has ramped up monitoring of IT outsourcing contracts, including on-site inspections, Panetta said, noting a sharp rise in serious cyber incidents reported by financial institutions last year.

"The financial sector is an attractive target, given its reliance on digital data and procedures," he said, stressing geopolitical tensions and nation-state actions heighten cyber risks.

Technology is also key for driving cost savings and lowering customer charges, the Bank of Italy noted, with online accounts costing on average 60 per cent less than traditional accounts. Panetta urged banks to leverage technology to enhance service quality and product offerings to bolster their reputation and client relationships, "which are their most valuable assets”.

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