Leadership Styles in Traditional Financial Service Providers and FinTechs

Which Organization Provides the More Favorable Conditions for the Development of an Ethical Corporate Culture?

von Torben Kramp

Bachelorarbeit
Vis. Prof. Dr. Harry W. Trummer

Abstract

After the Global Financial Crisis two important developments have come up in the sector of financial services. First, the general public, the clients and the regulators expect the financial players to operate in a more ethical way. Recent examples for this development are the high fines paid by the banks Wells Fargo and Deutsche Bank due to unethical and even criminal behavior. Second, a new form of financial service providers, named FinTechs, developed and recently gained much of attention due to high sums of invested capital into their businesses. While the traditional financial service providers have been concerned with applying the stricter regulations, such as Basel III, imposed to prevent another financial crisis, the FinTechs were able to develop without interruption. Now these startups offer all kinds of financial services by using the latest digital technology, such as mobile applications.

As a result of the two developments, an interesting question can be raised: Are the new market entrants eventually more capable of operating in an ethical way than their traditional market competitors?

In the scientific literature, the basic requirement described for any company to operate ethically is an ethical corporate culture. This culture in turn only develops if the leaders, especially those on top of the organization, are intrinsically motivated to lead their subordinates in an ethical way. Therefore, the key for the development of an ethical corporate culture is an ethical leadership style.

This is the case because the organizational members are incentivized by the ethical leaders to behave in an ethical manner through their role modeling and their implemented measures fostering the ethical correct conduct. Thereby, the ethical leadership style acts on two levels, the informal/ social level and the formal/ monetary level.

Objective of this thesis was therefore to examine which leaders, those of FinTechs or those of traditional financial service providers, have higher ethical leadership characteristics. Moreover, the goal was analyzing how the organizations’ sizes and development stages determine the ability of the ethical leaders to influence the organizational culture.

As the term “development” includes the implementation as well as the maintenance process of the ethical culture, both aspects were analyzed within this thesis.

In order to measure the ethical leadership style of the executives the Ethical Leadership Scale validated for the German language region was used. Moreover, qualitative interviews were conducted.

Thereby, the quantitative and qualitative empirical research revealed that both, FinTech and traditional financial service provider executives have medium to high ethical leadership styles, whereby the FinTech executives have the slightly higher ethical leadership characteristics. Furthermore, it was found that most of the evaluated companies in the study showed first characteristics of an ethical culture.

By considering the results of the research study as well as the theoretical implications, this thesis comes to the conclusion that FinTechs provide the more favorable conditions for the implementation of an ethical corporate culture. This is due to their size and the only recently established corporate culture. The leaders of FinTechs have much more influence on the culture than it is the case for leaders of traditional financial institutes. Here, a firmly established corporate culture is in place, which makes it much harder for the leaders to generate a change of thinking and behaving by the employees towards more ethical behavior.

However, once an ethical culture is in place both organization types provide equally beneficial conditions for its maintenance. Thereby, FinTechs make mostly use of social control. The traditional market players on the other hand make more use of compliance systems and comparable measures to ensure ethical behavior due to the greater anonymity.