Balancing Innovation and Stability: How Swedish Incumbent Banks Organize Innovation Under Digital Transformation and Fintech Competition

Abstract

Digital transformation and increasing fintech competition have significantly reshaped the banking sector, creating growing pressure on incumbent banks to adapt their organizational structures, technologies, and innovation practices. At the same time, banks operate within highly regulated environments characterized by operational complexity, risk management requirements, and high expectations regarding reliability and customer trust. These conditions create tensions between the need for innovation and the need to maintain operational stability. The purpose of this study is to explore how large Swedish incumbent banks organize innovation in response to digital transformation and increasing fintech competition. The study is based on a qualitative multiple-case study design including seven semi-structured interviews conducted with respondents from four large Swedish banks. The empirical material was analyzed through thematic analysis and interpreted using the theoretical perspectives of organizational ambidexterity and organizational inertia. The findings show that innovation within incumbent banks is primarily associated with operational modernization, customer-oriented digitalization, and the gradual improvement of existing services rather than highly disruptive transformation. Although exploratory innovation activities exist, they are often selectively pursued and expected to remain compatible with broader organizational priorities related to governance, operational continuity, and customer trust. The findings further indicate that banks organize innovation differently depending on strategic priorities and interpretations of innovation-related uncertainty. In addition, legacy systems, organizational complexity, and risk-oriented decision-making processes were found to create important constraints on organizational adaptation. The study concludes that incumbent banks primarily pursue innovation through gradual adaptation, operational integration, and selective forms of exploration rather than through highly disruptive transformation.