Financial Bureaucracy Featuring Innovation Bureaucracy – Insights from Diverging Pathways in the Baltic States

This paper investigates the integration of innovation-centric characteristics within traditional financial bureaucracies as they confront the rise of the Fintech sector. From the bureaucracy's perspective, Fintech acts as a significant disruptive force, challenging the established operational mandates of state financial institutions and compelling political regimes to fundamentally reassess their role in the digital economy. The paper explores this dynamic through the theoretical lens of 'transformative capacity,' which analyzes how organizational roles, resources, and abilities enable or constrain adaptation to a socio-technical change, underpinned by fintech, focusing on the core tension between fostering innovation and ensuring financial stability ('agile stability'). Employing a comparative case study of Estonia and Lithuania based on policy documents and 18 semi-structured interviews, the research reveals divergent national trajectories. Lithuania demonstrates a change-embracing, 'innovation-oriented' bureaucracy, characterized by strong leadership, a unified institutional structure, and robust coordination and learning mechanisms. In contrast, Estonia exhibits a fragmented, 'stability-oriented' bureaucracy marked by resource constraints, weaker coordination for market-facing innovation, and a reactive posture that leverages its e-state capacity more for internal efficiency than sector-wide support. The study concludes that institutional structures, resource allocation, and leadership are critical in shaping a financial bureaucracy’s capacity for agile stability, thereby determining the state’s effectiveness in navigating the opportunities and risks presented by FinTech.