Using dynamic capabilities to cope with digital transformation and boost innovation in traditional banks

Financial institutions operate in a competitive, complex, and uncertain environment. A series of changes—many accelerated by the COVID-19 pandemic—demand innovative movements from the organizations that operate in the sector. The emergence of new business models (e.g., fintecs) requires a realignment of the capabilities of traditional organizations, such as banks. Indeed, internal adaptations and the formulation of market strategies focused on a digital user are part of the current narrative. But how can it be executed? This article explores the relationship between dynamic capabilities and digital transformation. In summary, we present insights about how dynamic capabilities can drive innovation in traditional financial institutions based on the challenges brought by digital transformation. Starting from a Brazilian case study, we identified that external and internal contextual factors—especially the political-legal environment and cultural and governance issues—are necessary for stimulating the dynamic capabilities that should be addressed for digital transformation. Finally, we propose a framework that summarizes how dynamic capabilities enable the guidance of traditional banks amid challenges caused by digital transformation.