The three largest banks by assets in Singapore will be able to defend their market share against fintech competitors that are increasingly threatening their bank business, Moody's Investors Service said in a report yesterday.

While DBS Bank, OCBC Bank and United Overseas Bank (UOB) have abundant financial resources to invest in technology, start-ups are facing increasing competition for funding, said vice-president and senior analyst Simon Chen at the credit rating agency. Moody's noted that fewer fintech firms received funding last year than in previous years.

The banks' continued investments in digital transformation have enabled them to defend their competitiveness, Moody's noted.

Their digitisation efforts have helped them improve efficiency as technology significantly lowers costs involved in acquiring customers and processing transactions. Digital customers are also more profitable than traditional branch users.

But the rating agency said the banks' efficiency gains from digitisation have been insignificant. Between 2014 and last year, DBS spent a total of $1.8 billion on digital initiatives while UOB spent $1.6 billion. OCBC's technology spending amounted to 11 per cent (about $500 million) of its total operating expenses in both 2017 and last year.

The pace of branch closures has also been slow because the banks need to maintain physical outlets to cater to older customers who are less technology-savvy.

For banks to meet their targets to lower their cost-to-income ratios to less than 40 per cent in the coming years, from 43 to 44 per cent last year, they must increase the share of digital customers for their businesses, Moody's said.

Meanwhile, fintech firms are hampered by restrictions that prevent them from expanding into deposit-taking and lending, in order to preserve financial stability, Mr Chen said. This is despite Singapore's supportive environment for fintech innovation, with regulators actively encouraging companies to experiment with new products.

While start-ups have been gaining traction with products such as GrabPay, their ability to disrupt the financial services sector is also constrained by a high degree of banking penetration in Singapore and the three large banks' strong franchises. As a result, fintech firms increasingly opt to collaborate with banks to jointly develop products, instead of competing with them for market share. For banks, such partnerships enable them to streamline their internal processes.

Moody's said fintech firms are typically attracted by Singapore's developed financial infrastructure and policy framework, and the gateway it provides into South-east Asia. The number of fintech ventures in Singapore rose by 60 per cent to 756 at the end of October last year, up from 479 at end-2017, Moody's noted.

Prior to 2017, fintech investments in South-east Asia were primarily for digital payments and mobile wallets. But new fintech investments are increasingly flowing into emerging areas such as blockchain, online lending platforms, investment technology, robo advisory and artificial intelligence.

More than one-third of fintech funding in Singapore last year was for technology development related to financing for small and medium-sized enterprises as well as wealth management services.

Yesterday, DBS shares closed 14 cents lower at $24.67, while UOB rose 12 cents to $25.11 and OCBC gained two cents to $10.80.