This research explores the mediating role played by innovative performance on the relationship between digital transformation and competitive advantage in the Palestinian banking industry. Based on the resource-based view (RBV), this study postulates that digital transformation boosts innovation, which results in long-term competitive advantage. The study used a quantitative design based on survey data from 383 respondents from different Palestinian banks. Measurement and structured models were tested with PLS-SEM for reliability, validity, and relationships postulated for testing. The results show that digital transformation does not directly impact competitive advantage; instead, it is fully mediated by innovative performance. Specifically, it was found that digital transformation positively and significantly influenced innovative performance, and innovative performance positively and significantly influenced competitive advantage. The results identify innovation as the main vehicle through which digital transformation meets competitiveness in the banking industry. Theoretical contributions are achieved with this study by edge-driving the literature on digital transformation in emerging economies and with practical applications for policymakers and banking specialists who aim at capitalizing on digital projects towards long-term success.