Fintech grows cautiously as local leaders eye stability
Amid regulatory, economic and technological disruption, the fintech sector is showing signs of relative stability and promise, according to Silicon Valley Bank and local industry sources.
“Investment is up, cash burn is down, profitability is improving and revenue growth … has stabilized,” SVB reported in its “The Future of Fintech 2025” outlook, noting also that mergers and acquisitions are pacing toward a historic high, public offerings are increasing and more venture capital-backed companies are becoming buyers.
In Puerto Rico, the Birling Capital Puerto Rico Stock Index rose 15% year-to-year in July on the strength of investments in finance and fintech despite ongoing macroeconomic weakness.
Fintech in Puerto Rico
“There’s a lot of appetite for developing fintech in Puerto Rico. It’s booming here,” Héctor Jirau, executive director of Parallel18, the business acceleration program of the Puerto Rico Science, Technology and Research Trust, told News is my Business.
However, fintech here is growing at a slower pace than in other jurisdictions, “not because of a lack of innovators, capital or interest, but because our adoption is much more conservative,” he said.
Long after consumers on the mainland were able to open bank accounts online in minutes, Puerto Rico consumers still had to stand in line at branches with printed documents and wait days for an account to be opened. Apps crashed often, and you had to pay for each app function for your business, the P18 leader explained.
Today’s financial managers, Jirau added, experienced a time of fiscal crisis when they lost a significant amount of money, becoming more conservative as a result. “But as a new generation arrives with an appetite for risk, innovation, entrepreneurship and venture capital … it drives innovation to be integrated more quickly, and we’re already seeing these changes.”
Mariano Sanz, founder of Kiwi Credito, a San Juan-based fintech that provides loans up to $3,000 to help underbanked consumers build credit, also sees fintech thriving in Puerto Rico.
“Puerto Rico is a good market for fintech solutions. It’s a growing industry and will continue growing and attracting innovation,” he told News is my Business, noting that local consumers have been more open to fintech solutions since the COVID-19 pandemic.
Digital technology makes small loans feasible, and fintech can thrive on the island because local consumers have a high moral collateral, Sanz pointed out. “Puerto Ricans are good consumers. They’re responsible and want to establish their credit.”
A different world
The time for “free lunches” in fintech is over, SVB reported.
“Reflecting on the last decade, there are a lot of companies that wouldn’t be funded today. The ‘free lunch’ hook … worked at the time, but you can’t play that game anymore. The cost of capital is normalizing across consumer fintech. Now, it’s about getting back to basics,” SVB reported.
Fintech was on a growth trajectory from about 2016 to 2022. When interest rates went up, the capital dried up, Nicolás Galarza, founder of San Juan-based fintech Wealth2B, told News is my Business.
“Fintechs that raised capital and grew back then are now focused on generating profitability above anything else. With the client base they acquired, they can increase revenue without having to get new clients – that’s the value added of fintech,” he said.
The cheap capital that was accessible several years ago is gone. “There were a lot of angel investors in Puerto Rico that don’t exist anymore because they were part of that earlier wave of lots of capital, startups, investments and less risk aversion,” Galarza explained.
“Today it’s not the world of 2021, when fintechs could raise capital just for being fintechs. I was in that wave, and I can tell you that we live in a radically different world now,” he added.
Since 2022, the sector has been on a downward cycle when many investors have stopped investing. They want to see companies that can be profitable or close to it before even considering investing,” Galarza said.
“We’re not in a FOMO [fear of missing out] cycle, of wanting to get in at any cost. The criteria for investing are much stricter. We’re on the opposite side, with very skeptical people,” he said.
