NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

The software-as-a-service (SaaS) business model is leveling the playing field around the world, allowing small businesses to compete with larger firms at a fraction of the cost. However, in emerging markets like Latin America, the rise of SaaS has been slow. Many SaaS developers have found it difficult to achieve steady, rewarding growth. Variations between different consumer demands in each country, government regulations, currency restrictions and more make it difficult to deploy a SaaS product across borders in Latin America; this is confining most to their local markets, or forcing them to look outside of the region for support to scale.

Maturing internet and mobile connectivity in Latin America over the past few years, coupled with the current COVID-19 pandemic, has generated a new demand for SaaS solutions from small and medium-sized businesses (SMEs) looking to circumvent physical payment and logistics challenges, as well as governmental inefficiencies.

Latin America’s e-commerce sector has also boosted the demand for solutions that help businesses operate online. A projection of retail e-commerce sales for 2019 showed 21.3% growth, bringing total sales in Latin America last year to an impressive $71.3 billion. The SaaS market in Latin America is anticipated to grow at a similar rate (with a compound annual growth rate of 24.8%) and reach $5.3 billion by 2022.

There is proof that the SaaS industry can help fuel the region’s small and medium-sized businesses in a positive way.

Bringing more SMEs online and boosting business productivity

More than 90% of companies in Latin America fall into the SME category. SMEs are responsible for a significant portion of jobs and GDP in almost every Latin American country. For instance, small businesses in Brazil account for 27% of the Brazilian gross domestic product (GDP), and the number of small businesses is expected to increase by 43% by 2022. Meanwhile, SMEs employ about 80% of Mexico’s workforce, and make up about 52% of the Mexican GDP.

Still, as many as 75% of SMEs in the region fail within the first two years because of mismanagement. Many SMEs in Latin America operate outside of the official tax and legal frameworks. As a result, they often lack strategic business plans and face narrow margins, cash flow challenges and limited opportunities for growth. For local governments, the result is an underreporting of business activities, fewer taxes collected and lower productivity.

The good news is that approaches to digital transformation are maturing, and easily-implemented cloud-based services are on the rise. From accounting and invoicing to inventory and shipping, SaaS platforms that help SMEs bring these once-informal processes online are not only boosting individual business productivity levels, but helping to improve overall economic growth in the region as well. With more than 60,000 small businesses already on board, Chile’s Nubox is now one of the fastest-growing financial management automation platforms in the region. Nubox helps SMEs automate accounting, payroll and electronic invoicing all in one place.

A handful of SaaS platforms are helping to bring more SMEs online as well. Tiendanube, for instance, is home to more than 27,000 active online stores. The platform is registering an average of 500 new digital businesses per day and is a regional leader in the online store platform space, even though it is competing with giants like Shopify and Mercado Libre. Canasta Rosa is a similar platform that emerged recently on the scene, providing a platform similar to Etsy for vendors to sell handmade crafts. According to Canasta Rosa, 97% of its sellers are women, and a majority are small or micro-entrepreneurs.

Unifying the region and cross-border business activities

While Latin America is by no means a unified market, similar challenges can be found across the region, and innovative SaaS startups are introducing new solutions to solve them. Latin American consumers are feeling increasingly safe about purchasing and paying for goods online, and SMEs have a big opportunity to provide better services than their competitors, who may still be using pen-and-paper methods, or stuck using legacy software.

SaaS systems that provide real-time notifications about orders, delivery status, etc. can boost consumer confidence, and ultimately, sales for the businesses. SaaS platforms also provide SMEs a competitive advantage by using technology and data that incorporates learnings from across the region. For instance, inefficiencies in package delivery options were the motivation behind Chazki, a Peruvian last-mile logistics startup that offers businesses personalized delivery capabilities with real-time traceability – including service to some of the region’s most difficult-to-reach addresses.

Most business activity in Latin America is still predominantly cash-driven. However, as e-commerce activity in the region grows and business activities move online, a shift away from cash is also well underway, as SMEs need improved ways to bank and collect payments online.

A number of fintechs operating with SaaS business models have emerged in recent years to help SMEs deal with currency exchange and payment routing, to accept non-standard payment methods, and even to handle accounting, sales reporting and calculating taxes automatically on cross-border transactions. Mexico’s mobile payment app Clip is one of the most notable startups making it easier for small business owners to accept credit and debit card payments via a portable card reader device. Users can control payment options and review sales reports within the app.

Growing attention on Latin American B2B potential

For most SaaS businesses born in Latin America over the past 10 years, there were simply too many barriers to scale seriously, and targeting the U.S. market was often the only way to go. However, as more and more Latin American SMEs come online – out of demand or necessity –business opportunities are expanding, as these enterprises need affordable software solutions. According to a LAVCA survey, 69% of Latin American startups now identify business-to-business (B2B) as core to their go-to-market strategy.

International service providers, such as Amazon Web Services, are also entering Latin America for the first time, providing the support needed for firms to store data locally and scale their operations more quickly and affordably.

As the word about B2B opportunities in Latin America spreads, global investors are also paying more attention to this once-overlooked region. Not only is there less competition in Latin America, but high-quality, affordable technical talent means SaaS solutions are often able to operate and scale more efficiently than in other regions of the world. The B2B SaaS market is relatively new to Latin America. However, SMEs are ramping up the adoption of SaaS solutions to meet consumer demand, cut day-to-day costs and free up time to focus on tasks that are more central to their businesses. All of these factors could lead to a vast improvement in business development – and big payoffs for customers.

Greg Mitchell is the Regional Director of Angel Ventures.

Photo courtesy of Danial RiCaRoS.