FINV.US
FinVolution finds big growth overseas

The fintech lender launched its international expansion in 2018, and plans to enter more countries this year and next

Key Takeaways:

  • FinVolution has accelerated its overseas expansion as demand slows in its home China market, with its international business contributing a fifth of revenue in the third quarter
  • The fintech lender’s international revenue grew 8.7% in last year’s third quarter and is expected to accelerate as the dust settles from recent regulatory changes in Indonesia

  

By Doug Young

Global diversification has become a flavor of the day for Chinese companies that grew up feasting on a fast-growing domestic economy that has become more challenging lately. But while many are still testing the waters, FinVolution Group (FINV.US), as one of China’s earliest fintech lenders to venture abroad, is already reaping significant business from its global gambit.

Since taking its first global step by establishing an Indonesian joint venture in 2018, FinVolution has grown its international operation to account for about a fifth of its revenue. It moved into the Philippines not long after Indonesia, and entered Pakistan last year, with plans to further boost its global footprint in the next few years.

But such gambits, aren’t without their own risks, especially on the regulatory front. FinVolution became keenly aware of that fact when Indonesia, its largest global market, made a sudden regulatory change in late 2023, causing that part of the company’s revenue growth to slow.

FinVolution was founded in 2007, lending to both Chinese consumers and small businesses who had trouble borrowing money from traditional banks that dominated China’s financial landscape at that time. The company, along with peers like Qifu (QFIN.US) and LexinFintech (LX.US), thrived in the 2010s by meeting an unmet need in the market from private businesses and increasingly wealthy consumers.

As China changed its regulatory policy and required all lending funds to originate from licensed financial institutions, FinVolution transformed its business model to loan facilitation about a decade after its founding and began to explore global markets. China’s slowing economy has further dampened growth for the group of companies, adding urgency to their need for diversification abroad.

FinVolution’s big global breadwinner is Indonesia, said Gu Ming, a senior vice president and one of two heads of FinVolution’s international operation, speaking to Bamboo Works in connection with his participation on a panel about the future of fintech in Southeast Asia at the Asia Financial Forum this week in Hong Kong.

Gu said Indonesia currently provides about 70% of Finvolution’s international revenue, which grew 8.7% in last year’s third quarter to 635.5 million yuan ($90.6 million), more than triple the 2.5% growth for the company’s overall revenue during the period. Most of the rest of its global revenue comes from the Philippines, he added.

“For such developing countries, you’re more likely to serve people who haven’t been served by financial institutions there – people who have never gotten loans,” he said. “Typically in these markets it’s individual, not business, loans. But a lot of them are micro business owners, like a food stall on the street. These are the typical people. We’re not serving the richest, most wealthy customers.”

Gu pointed out that markets like Indonesia and the Philippines are much like China was 10 to 20 years ago. The average loan size in those markets is between $100 and $300 with typical terms of three to four months, he said. By comparison, the company’s average loan size in China during the third quarter was more than four times the high end of that range at 10,066, or about $1,400.

Regulatory risks

While Indonesia has been FinVolution’s big success story, it also offers an important lesson into the risks of operating in developing markets where regulations can often change in step with development of the local financial system. FinVolution learned that lesson in October 2023, when the company’s Indonesian business was notified by the local regulator that the maximum daily interest rate it could charge would be cut from 0.4% at that time to 0.3% starting Jan. 1 2024 – or in less than three months.

The move not only cost the company in terms of revenue but also sent it scrambling to comply with the change, including adjusting all of its loans that were currently acceptable but would fall out of compliance on Jan. 1, 2024.

As a result of the change, FinVolution’s Indonesia revenue growth slowed, even as its number of borrowers in the market continued to grow. “The number of loans was still growing, but revenue was growing slower,” Gu said. “You’re serving more higher quality customers but you can charge less.” The Philippines continued to grow strongly, he added, roughly doubling its revenue last year, helping to offset the Indonesian slowdown.

Additionally, under Indonesia’s adjusted interest rate policy, effective from Jan. 1 this year, the local regulator has implemented differentiated pricing based on loan duration. Specifically, the daily interest rate cap for loans of six months or less remains at 0.3%, while the cap for loans exceeding six months has been adjusted to 0.2%. Given that FinVolution’s average loan tenure is three to four months, the impact on its business operations is expected to be minimal.

Apart from Indonesia, the company further expanded its global expansion last year by entering Pakistan in the second half of 2024. Gu said the company also plans to expand into Latin America and one or more African markets in the future.

He said the global expansion allows FinVolution to take advantage of its technology-driven tools and systems developed at home that let it lend to consumers and small businesses overlooked by banks, while keeping risks at acceptable levels. He said the company prefers to be a loan facilitator between borrowers and established local banks over the longer term.

Management previously said on the company’s 2024 third-quarter earnings call that Indonesia is able to contribute more meaningful profits in the current stable pricing environment, and that it expects its Philippines operations to contribute profits in 2025.

The global diversification not only means higher revenue growth but could also have significant implications for FinVolution’s stock. Its shares now trade at a relatively depressed price-to-earnings (P/E) ratio of 5.9, even after a 40% gain for the stock over the past year. Qifu’s trades at a similarly depressed 7.5.

FinVolution has previously said it would like to raise the contribution of its international business to 50% of its revenue by 2030 by offering service in 10 or more countries by that time. Such a target looks challenging but potentially achievable given its current state. Such diversification would certainly help to not only boost the company’s growth but also potentially lift its stock by transforming its status to a more international company.

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