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Banking & Finance

Consumer lending a contested landscape

Released at: 08:12, 11/12/2019

Consumer lending a contested landscape

Photo: Viet Tuan

Competition is heating up in Vietnam's consumer lending market as existing foreign financial organizations rush to expand as new entrants join the market.

by Hung Cao

South Korea’s Hyundai Card, the financial arm of auto giant the Hyundai Motor Group, recently announced its arrival in Vietnam after signing a contract with the Finance Company Limited for the Community (FCCOM), a subsidiary of the Maritime Commercial Joint Stock Bank (MSB), in which it will purchase a 50 per cent stake for $41.9 million. The joint venture, which marks Hyundai Card’s first overseas endeavor, is touted as a new growth engine in the Southeast Asian market in a company statement.

Consumer lending in Vietnam has increased strongly in recent times on the back of rising affluence amid strong economic growth. “As the market continues its growth momentum, new players, including foreign financial institutions, have been looking for entry into the country,” said Mr. Masataka Yoshida, Senior Managing Director, Head of the Cross-Border Division, and CEO Vietnam at the Recof Corporation, a Japan-based merger and acquisition (M&A) consulting firm.

One after the other

Before Hyundai Card, a host of other South Korean financial players penetrated into Vietnam’s fast-growing consumer finance market. Lotte Card acquired Techcom Finance in 2017 and joined the market in launching Lotte Finance at the end of 2018, with main products including cash loans, durable loans, and credit cards. After its launch at the end of last year, when it had only two service introduction points (SIP) and some 200 staff, the company now has more than 20 SIPs in 16 cities and provinces and nearly 1,000 members of staff.

Taking advantage of its wide-ranging retail portfolio in Vietnam, Lotte Finance together with Lotte Department Store and Lotte Mart launched two brand-new associate credit cards to offer customers a more diverse selection of credit card products and enhance their spending. “Not only providing customers with daily financial products, Lotte Finance’s business also focuses on offering them other financial services solutions,” said Mr. Kim Jong Geuk, CEO of Lotte Finance. “Lotte Card’s entry into Vietnam’s consumer finance market has helped expand access to financial services among Vietnamese people, including middle-income earners.”

Another leading South Korean credit card issuer, Shinhan Card, took over Prudential Finance in a $150-million deal and introduced its consumer finance affiliate the Shinhan Vietnam Finance Company (SVFC) last July, with products ranging from cash loans to installment plans, leases, credit cards, and other specialized loans. 

Mr. Chun Sang Yung, Chairman of SVFC, said that as a consumer finance market leader in South Korea, Shinhan Card will adopt proven financial technologies (fintech) in Vietnam on a step-by-step basis. Based on digital trends and the advancement of fintech, the company plans to introduce mobile platform-based digital technology and hyper-personalized marketing solutions using big data analysis.

In addition to South Korean investors, Japanese financial companies have also forayed into the space, such as Credit Saison and Shinsei Bank forming joint ventures with Vietnamese lenders HD Bank and Military Bank (MBBank), respectively. Aeon Financial Service (AFS), the owner of Japan’s Aeon retail chain, has not hid its ambition of expanding its financial services in Vietnam via M&As with foreign or State-owned financial companies, according to AFS Chairman Mr. Masaki Suzuki.

The most popular way for foreign corporations to enter Vietnam’s financial market is to acquire stakes in local banks or buy financial companies instead of establishing their own, according to Mr. Yoshida from Recof. “Establishing a completely new financial company in Vietnam would entail many legal and procedural difficulties, while teaming up with domestic partners allows foreign investors to enter Vietnam much more quickly and easily,” he told VET. “The government is also seen as supporting foreign investors with expertise and financial strength to enter and activate the financial industry.” 

Rising inflows

Mr. Sumit Popli, Partner at McKinsey & Co, agrees that inorganic entry is the only feasible way to enter the market, as the State Bank of Vietnam (SBV) has yet to issue new licenses to foreign investors. Consumer finance requires players have a deep understanding of the local market and operational capabilities, which local partners are able to bring. 

The majority of consumer finance players in Vietnam - eight out of 16 companies - are either owned by or have partnerships with banks, according to figures from McKinsey & Co. They lead the market with a 60 per cent share, led by FE Credit, which holds almost 50 per cent. Increasingly, non-bank-owned consumer credit players are also entering the market and have secured a 25 per cent market share. “Consumer credit businesses are also increasingly becoming key providers of unsecured finance to customer segments who would traditionally not be served by banks and who would have to resort to money lenders,” Mr. Popli said.

McKinsey’s analysis found that Vietnam sees a much higher return-on-equity (ROE) for consumer credit, of 38 per cent, with margins expanding at a higher rate compared to the ASEAN average, at 15-25 per cent. The industry is moving from a land grab phase to more professional consumer lending, with players building professional management teams and institutional capabilities and adopting cutting-edge digital and technology infrastructure.

Though Vietnam remains a cash-dominated market, consumer banking preferences are continuously evolving with digital adoption, according to Mr. Bruce Delteil, Partner at McKinsey & Co. Around 62 per cent of retail customers would consider shifting to a branchless bank and move about one-third of their balance to a digital bank. Financial services players would, however, have to invest in offerings, initiatives, and the customer experience to influence customer behavior.

It’s also apparent that the soundness and resilience of Vietnam’s financial services market have been strengthened thanks to the government’s comprehensive efforts to restructure banks, resolve bad debts, and adopt international risk frameworks. “As the country is considered an investment destination of potential for fintech in Asia, which may reshape the competitive environment among providers in the country, this may present new challenges that require a stronger regulatory and supervisory framework,” Mr. Yoshida said.

Recent data revealed that the share of consumer lending within Vietnam’s total outstanding loans is only about 12 per cent, compared to 34 per cent in ASEAN and 40-50 per cent in developed countries. With such low penetration, a shift in consumer behavior, and a large proportion of unserved customers in Vietnam, foreign investors believe consumer credit can be boosted.

Hurdles to surmount

As inorganic entry is the best and most feasible way to enter and there are a limited number of local consumer finance players, Mr. Popli believes foreign investors need large capital sources to win in a hyper-competitive market like Vietnam. In terms of operations, limited bureau coverage and data availability and quality issues limit assessments of borrower capabilities. While the industry is developing rapidly, the legal and regulatory framework is still evolving, especially around collaboration and partnerships between credit institutions, fintechs, and data providers.

One of the main barriers, according to Mr. Kim from Lotte Finance, is customer awareness of official finance companies. “It is still hard for them to identify legal and trustworthy financial companies,” he said. “Customers seems to be hesitant when accessing consumer finance because of factors such as interest rates and trust.” 

Another challenge is risk management, as information for verifying customer data is quite limited in Vietnam. “Taking advantage of our parent company’s technological foundation, Lotte Finance can overcome this challenge,” he went on. “We make significant investments in developing effective underwriting processes and customer information appraisal systems based on advanced credit management technology like fintech and big data. This will also help minimize credit risks in the future.”

Moreover, rapid credit expansion often masks risk control issues such as aggressive lending practices that can lead to low asset quality, high non-performing loans, and high exposure to real estate, according to Mr. Yoshida. “Most retail loans in Vietnam are secured by property, but the prospects for the recovery of bad loans are largely untested, which may make banks vulnerable to a property market downturn,” he said. “A period of heated growth is often followed by big problems for lenders, especially in debt management and bad debt settlement.” 

In a bid to mitigate risk and fraud, the SBV has proposed several measures in recent years to discourage over-lending to the real estate sector and to tighten regulations on the consumer finance market, such as imposing lending caps on the micro-consumer loan sector, which should deter over-borrowing and help ease any build-up in systemic risks. 

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