The fintech lender announced a major boost in the size of the borrowing facility from its Indonesia partner, though the expanded amount is still small at around $30 million

Key Takeaways:

  • FinVolution has announced a major expansion in the size of its borrowing facility from Indonesian partner PT Bank Jago
  • The fintech lender still gets a miniscule part of its business from outside China, with international loans accounting for just 2% of its lending transaction volume

By Doug Young

Every journey begins with a single step, especially when that first step is a big one outside your familiar home market into unfamiliar lands.

That could well be the mantra for fintech lender FinVolution Group (FINV.US), which has just announced a new step in Indonesia that looks more important symbolically than in terms of actual business. The company said the size of the lending facility for its AdaKami Indonesian unit was boosted fivefold by its local partner PT Bank Jago Tbk, nearly a year after the pair first formed their tie-up.

While such a big increase initially sounds impressive, it loses a bit of that punch after a currency conversion reveals the new loan facility’s size, 500 billion rupiah, equates to just $33 million in U.S. dollar terms. That means the previous amount, 100 billion rupiah, was quite small, perhaps enough to provide loans to a few hundred people if we presume an average loan size of $10,000.

So, perhaps this won’t make a huge difference to FinVolution’s business anytime soon. But, as we said at the start, every journey begins with a single step. And indeed, FinVolution appears to be at the head of the pack among its peers in this global journey, as none of its major rivals made any mention of international operations in their latest quarterly reports.

Investors seemed to give FinVolution’s modest new global advance a cautious thumbs up, with the stock rallying as much as 3.3% on Monday in New York, before giving away all the gains in the last hour of trade to finish the day unchanged. Still, that beats a 1% decline for the broader S&P 500 Index, leading to our assessment that investors gave it a cautious thumbs up.

Investors also seem to like FinVolution more than its other fintech lending peers, giving it a price-to-earnings (P/E) ratio of 3.7. Its closest rival is 3.5 ratio for Lufax (LU.US), which is a much larger company and better connected due to its ties to financial giant Ping An. Similar-sized peers 360 DigiTech (QFIN.US) and LexinFintech (LX.US) also trade at lower P/E ratios of 3.0 and 2.2, respectively.

FinVolution’s journey abroad parallels that of many other Chinese tech companies, which often choose Southeast Asia for their first baby steps outside their home market. Such markets share more similarities with China due to their similar stages of development than western markets that are more lucrative but also far less familiar and very competitive.

Most of China’s smartphone makers like Xiaomi (1810.HK) and Oppo are quite active throughout the region, and used it as a springboard before later moving to western markets. Similarly, e-commerce giants Alibaba (BABA.US; 9988.HK) and (JD.US) have both chosen the region for some of their biggest initiatives outside China.

Fintech lenders like FinVolution have yet to make such big moves outside China, mostly because most are much younger with histories only dating back around seven or eight years when Beijing first opened the domestic financial services market to private participation. But others could soon follow FinVolution abroad as China’s regulatory oversight of the group becomes increasingly tight over concerns about aggressive lending practices that reflect inexperience in risk control.

Growing footprint

All that said, we’ll take a closer look at FinVolution’s growing Southeast Asian footprint, and what kind of potential the market could offer. The company’s latest annual report shows it obtained its earliest licenses for the region in the Philippines in 2018 and 2019. It set up its Indonesia subsidiary in 2019 after obtaining a fintech lending license for that market. It also lists Vietnam as one of its international markets in its latest annual report, though it makes no mention of having received a license to do business there.

It formed the Indonesia partnership with Bank Jago last October, and the latest announcement indicates the bank could be its primary partner in the market going forward. That’s quite an important development logistically, since such a local partner will not only provide funding for the Indonesian operation, but, perhaps more importantly, will help FinVolution navigate the unfamiliar market that is Southeast Asia’s largest.

From a size perspective, FinVolution’s international business is still quite small compared with its business in China. Its international lending transaction volume totaled just 910 million yuan ($127 million) in this year’s second quarter, accounting for just 2.1% of its total. What’s more, the international transaction volume was down 3.2% from a year earlier – not exactly the healthiest sign for a potential new growth area.

The international business looked a little better in terms of FinVolution’s overall outstanding loan balance. In that regard, the company’s outstanding loan balance outside China was up 60% year-on-year to 480 million yuan. But again, the absolute figure was quite small, with international loans accounting for just under 1% of the company’s total outstanding loan balance at the end of the second quarter.

In terms of user numbers, FinVolution had 9 million registered users for its overseas business at the end of last year, more than double the 4 million at the end of 2020. But again, the 9 million users was tiny compared with the company’s 131 million registered users in China at the end of last year. All of this should drive home the point that FinVolution’s overseas business is growing, but is still quite small compared with its home China market.

That’s not to say that the business can’t grow quite rapidly once the company finds the right formula for success. Good cases of that come from two other fintechs, online brokerages Futu (FUTU.US) and UP Fintech (TIGR.US). Both companies started out over the last decade as brokers helping Chinese customers buy stocks in the U.S. and Hong Kong. But each now gets more business outside the Chinese mainland, after Chinese regulators made increasingly ominous sounds indicating both companies could be operating without the necessary business licenses.

FinVolution and its fintech lending peers seem to be on more solid regulatory footing than the two brokerages in China, which is why they are feeling less urgency to diversify abroad. Still, it’s never too early for such fintech lenders to start thinking about a future when China’s fickle regulators might clamp down on the group even more in its ongoing drive to stamp out risks in the country’s young private financial sector.

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