Why the subscription model is set to boom in LatAm
This article was originally published in CFODive.
Latin America may have lagged behind other regions such as Europe and North America when it comes to subscription service adoption, but now it’s playing catch up. Even before the pandemic, SaaS in the region was predicted to grow at a compound annual growth rate of almost 25% from 2018 to 2023. With the advent of COVID-induced increased technology adoption, the number of businesses turning to subscription-based services is only set to rise further. In fact, Brazilian fintech Vindi reported that digital subscriptions and SaaS payments grew by 31.5% in just the first few months of the coronavirus pandemic – a trend that continued onwards as social digital services became ubiquitous.
Yet despite the region’s vaccination rollout and lifting of restrictions, this surge in subscription adoption will keep its momentum. Subscription-based models offer both vendors and customers a myriad of benefits, including deepened client relationships, better insights on product use, and more accurate projections. While COVID was a catalyst to much of the region’s subscription service adoption, the foundations are now laid for its continued success. Here’s why.
Emerging Credit Opportunities Around Subscriptions
Accessing credit in LatAm is a distinct picture from that of the Global North. Many people don’t operate within traditional financial structures (37% of Mexicans over 15 years old don’t have a bank account) and close to 60% of the working population works in informal labor. In the business world, only 45% of small and medium-sized businesses (SMBs) have access to credit from financial institutions in LatAm.
To combat these blockers, many non-financial institutions are beginning to provide lines of credit for citizens in the region. For example, Mexican convenience store Oxxo is offering loans of up to almost $2,500 to its customers.
In the SMB space, telecommunications companies and technology distributors are also providing lines of credit on subscription services to companies that wouldn’t gain access to the same financial services through traditional banking. Telco companies like TelMex and Telcel are providing customers with digital services that can be paid for monthly through credit.
This increased access to subscription services via lines of credit from non-traditional lenders will lead to heightened adoption of subscription models across the region in the coming years.
Increased Public Cloud Adoption Will Drive Subscriptions
Apart from public utilities, subscription models are still relatively new to the LatAm market. As cloud vendors have increased their reach in the region over the last decade, more companies will come into contact with subscription services and start to leverage their many benefits.
Cloud infrastructure services such as AWS have their foot now firmly printed in the region, and cloud computing is expected to grow at a rate of 22.4% between 2019 and 2023. The IDC also predicted in 2020 that the post-pandemic era would see an uptick in cloud adoption. According to Alejandro Floreán, IDC’s VP of Consulting and Enterprise Research for Latin America, “Cloud suppliers will have more influence over data centers and businesses will increase their use of the public cloud during the pandemic so as to leverage its flexibility and scalability.”
The arrival of these big players will mean wider, stronger, and faster cloud infrastructure in LatAm. This increases opportunities for SMBs to utilize cloud-based services such as SaaS, which champion the subscription model. In turn, customers of SMBs will enjoy more flexibility to increase and decrease the services they consume monthly, deepening the business-client relationship and ultimately driving adoption.
While the stage is certainly set for subscription model growth in LatAm, the ability of big cloud players to truly disrupt the market in LatAm is still hindered by one thing: the currency they accept. In fact, 54% of Brazilians won’t buy a digital product if it’s charged in USD.
Technology infrastructure companies based in LatAm have a grasp on the IT infrastructure services market, and many have been providing on-premise data center services to major companies for decades. New cloud players that offer their services in USD may struggle to attract companies who are used to paying rates charged in their own currencies and cannot justify the expense of paying for AWS or Azure.
Once these large cloud companies begin to offer their infrastructure services in local currencies, they will disrupt local IT infrastructure services markets and create even more competition for local players.
Over the coming decade, we should expect to see LatAm technology companies become a bigger part of the global ecosystem of IT products and services. Much of this will be due to the growth of the subscription model in the region, which will also lead to a proliferation of marketplaces and ecosystems that feature LatAm companies built atop cloud infrastructure. The more digital-forward companies that shift to a subscription model, the more traditional firms will follow suit, and cloud-based subscription services will soon enough become ubiquitous in LatAm’s digital economy.