Jiko CEO Stephane Lintner
CNBC learned that a tiny start-up run by a former Goldman Sachs dealer became the first fintech company to complete the acquisition of a nationally regulated US bank.
Jiko, a 23-strong company co-founded by Stephane Lintner, has entered into a purchase agreement for Mid Central National Bank, a 63-year-old Minnesota-based retail bank, according to people with knowledge of the transaction. The startup secured approval to move from the Office of the Currency Auditor and the Federal Reserve Bank of San Francisco.
The move by Jiko, who describes himself as a new breed of bank, allows broad access to the highly regulated US market. Fintech companies must choose one of three avenues to enter this market: acquire a banking institution, apply to be a chartered bank, or work with an existing lender.
Most of the new online banks like Chime and Current have chosen to work with existing FDIC-backed institutions as this is the fastest way to get started. Last month, Varo Money became the first consumer fintech company to receive a banking charter from the government upon request.
But Jiko, a company that has flown under the radar since it was founded in 2016, is the first of the youngest fintechs to complete a regulated bank acquisition, allowing Americans to offer a wide range of financial services. The Lending Club, one of the largest US personal loan providers, announced that it bought Radius Bancorp in February. However, that deal will close in 2021, CNBC reported at the time.
"Jiko's move marks an important milestone in the maturity and development of fintech companies looking to expand the reach of their products and services," said Brian Brooks in a statement. "It shows the value and attractiveness of banks and especially the federal banking system."
That the US regulators have blessed the Jiko transaction is so important mainly because it is fundamentally different: It is a consumer bank that is not about holding deposits.
Instead, customer money temporarily ends up in an FDIC-backed account before being withdrawn into treasury bills, which are liquidated when a person uses a debit card or withdraws cash from ATMs. Instead of ceding the returns on those investments to the typical bank that takes deposits and buys government bonds or borrows the money, the Jiko client keeps it.
Lintner, 40, is a PhD in computational math who spent nearly a decade on the Goldman Sachs trading platform helping the bank automate the buying and selling of stocks and derivatives. It was there, during the 2008 financial crisis, how institutions around the world made catastrophic bets that threatened the safety of customer deposits.
"When I saw what happened to deposits, I just thought there had to be some other way to give people that money experience without getting them involved with the risky lenders," Lintner said. "I don't want a society that breaks down every now and then."
He left the New York-based bank in 2016 with the crux of an idea: how could you shut down the middlemen in banking?
His response was to give bank customers direct access to government bonds, which are backed by the US government and are considered one of the least risky investments available. Jiko means "self" in Japanese.
The Jiko account, which has been in beta mode for two years, works like a combination of a checking account and a savings account. The bank's app is being redesigned with more features, including a cashback debit card and token bank account numbers. It will be published before the end of the year.
"Now that you have money that's transparently stored, you know what you're holding, you're not funding the North Dakota pipeline or anything," Lintner said. "You get what the money makes, the Treasury Bill rates, which is the first thing banks do, when they get your money, they buy T-bills."
Since the money at Jiko is transferred to a brokerage account invested in T-Bills, it is covered by the Securities Investor Protection Corporation [SIPC] rather than the FDIC for up to $ 500,000.
Not risk free
It remains to be seen, however, whether American bank customers will want to take the risk of fluctuations in the value of assets that are themselves as safe as T-bills in exchange for the chance of higher returns.
The Jiko account achieved an annualized return of 3.3% last year, well above the rate most major banks pay, Lintner said. But interest rates have fallen since when the Federal Reserve cut rates in response to the coronavirus pandemic.
In the meantime, the stationary bank acquired by the start-up, formerly known as the Mid-Central Federal Savings Bank, will continue to operate its three Minnesota branches as a regular bank.
With Jiko passing the return on investment and most of the swipe fees for an upcoming debit card on to customers, Lintner intends to charge a "Netflix-like" subscription fee.
"As the first place to put money, it's an excellent place to make money," Lintner said of Treasuries. "We've built a scalable platform, we can go from zero to 300 million Americans, and do a lot of things with absolute stability. Now we can deliver a great experience and a host of other features."