Introducing Fintech Fundamentals
Unpacking how fintech works, from the ground up
Over the past ten years, the fintech ecosystem has expanded massively. Venture investment in fintechs has surged nearly 30x since 2010, and 23,000 new fintech companies were launched in the United States between 2016 and 2020. And yet, as the industry has grown, getting a grasp of the fintech ecosystem has become increasingly daunting. Fintech encompasses a wide range of themes, and every day there seems to be a new buzzword. Where to begin to understand it all?
Both of us (Izzi and Max) have experienced the complexity of fintech as investors at Nyca Partners, a fintech-focused VC fund. Many resources—from blogs to newsletters to thoughtful Twitter threads—have helped us make sense of the landscape and the various business models that fintechs have embraced. That said, we have realized that in some cases, it is easy to gain a surface-level understanding of a business model without really grasping the underlying fundamentals that make the proposed solution viable, or that necessitate that solution in the first place.
For example, why does it take up to seven days for an ACH deposit to show up in Robinhood or Coinbase? Why do fintechs partner with a certain subset of issuing banks when monetizing via interchange? Why can one earn 8% yield on a stablecoin account while a USD high-yield account earns only 0.5%? How do the various credit vehicles (warehouse, forward flow, etc.) compare, and what are the tradeoffs a fintech considers when choosing which type to use? We often come across questions like these—that dig into how fintech works “under the hood”—and have found that while they are answerable, piecing together the answers usually requires skimming through way too many links. Sometimes it’s easier to accept these fundamentals as fact, without really understanding the mechanisms behind them.
Our motivation to create this blog arises from our own desire to gain a better understanding of the fundamentals of fintech. We hope that sharing our learnings will help others in the fintech community (and the fintech curious!) to avoid the confusion and 20-tab Internet browsers that we faced when coming across these questions for the first time. Our core goal will be to explain everything from first principles; we’ll do our best to dig through the layers of complexity that sit beneath many fintech applications to describe the mechanics of how fintech products work, why fintechs operate the way they do, and what innovations look most promising.
Our first blog post addresses a bread-and-butter topic in fintech, the process underlying ACH debits. While payments experts will likely already be familiar with most of what we discuss, we hope that describing the details of ACH will be useful to anyone who, like us until recently, has only a general understanding of U.S. payments systems.