Start-up co-founded by ex-Goldman trader is first fintech to complete takeover of a national bank

A tiny start-up led by a former Goldman Sachs trader has become the first fintech firm to complete the acquisition of a nationally-regulated U.S. bank, CNBC has learned.

Jiko, a 23-person company founded by Stephane Lintner, has closed a deal to purchase Mid Central National Bank, a 63-year old retail bank based in Minnesota, according to people with knowledge of the transaction. The start-up secured approval for the move from the Office of the Comptroller of the Currency and the Federal Reserve Bank of San Francisco, these people said.

The move by Jiko, which bills itself as a new kind of bank, gives it broad access to the highly-regulated U.S. market. Fintech firms have to choose one of three ways to break into this market: acquire a banking institution, apply to become a chartered bank, or partner with an existing lender.

Most of the new breed of online only-banks like Chime and Current chose to team up with existing FDIC-backed institutions, as that is the fastest way to get started. Last month, Varo Money became the first consumer fintech firm to earn a banking charter from the government through an application.

But Jiko, a company that has flown under the radar since its creation in 2016, is the first of the recent wave of fintechs to complete the takeover of a regulated bank, allowing it to offer Americans a broad array of financial services. Lending Club, one of the biggest U.S. providers of personal loans, said it was buying Radius Bancorp in February, but that deal will close in 2021, CNBC reported at the time.

“The move by Jiko represents an important milestone in the maturity and evolution of fintech companies seeking to expand the reach of their products and services by becoming banks, buying or combining with a bank, or continuing to partner with banks,” Acting Comptroller of the Currency Brian Brooks said in a statement. “It demonstrates the value and attractiveness of banks and in particular the federal banking system.”

That U.S. regulators blessed the Jiko transaction is significant mostly because of how fundamentally different it is: It’s a consumer bank that doesn’t hold deposits.

Instead, customer money is swept into Treasury Bills, which are liquidated when a person uses a debit card or withdraws cash from ATMs. Rather than ceding the yield on those investments to the typical bank, which takes deposits and buys Treasuries or lends out the money, the Jiko customer keeps it.

Lintner, 40, is a computational mathematics PhD who spent nearly a decade on the trading floor of Goldman Sachs, helping the bank automate the buying and selling of stocks and derivatives. There, he saw during the 2008 financial crisis institutions around the world make disastrous bets that threatened the safety of customer deposits.

“Once I saw what happens to deposits, I just thought there had to be another way to give people that money experience without entangling it with the risky lenders,” Lintner said. “I don’t want a society that collapses once in a while.”

He left the New York-based bank in 2016 with the kernel of an idea: How could you cut out the middlemen in banking?

His answer was to give banking customers direct access to Treasuries, which are backed by the U.S. government and considered one of the least risky investments available. Jiko means “self” in Japanese.

The Jiko account, which has been in beta mode for the past two years, functions like a combination of a checking and savings account. The bank’s app is being revamped with more features, including a cash-back debit card and tokenized bank account numbers, and will be released before year-end.

“Now that you’ve gotten money that’s transparently stored, you know what you’re holding, you’re not funding the North Dakota pipeline or something like that,” Lintner said. “You’re getting what that money is earning, the Treasury Bill rates, which is the first thing that banks do when they get your money, they buy T-Bills.”

Since money at Jiko is swept into a brokerage account invested in T-Bills, it’s covered for up to $500,000 by the Securities Investor Protection Corporation, or SIPC, and not the FDIC.

But it remains to be seen if American banking customers want to assume the risk of fluctuations in the value of investments, even as safe as T-Bills, in exchange for the chance of greater yield.

The Jiko account generated a 3.3% annualized return last year, far outstripping the rate that most big banks pay, Lintner said. But interest rates have fallen since then as the Federal Reserve slashed rates in response to the coronavirus pandemic.

Meanwhile, the brick and mortar bank the start-up is acquiring, formerly known as Mid-Central Federal Savings Bank, will continue to operate its three branches in Minnesota as a normal bank.

Since Jiko passes on the yield from investments and most of the swipe fees on an upcoming debit card to customers, Lintner said he envisions charging a “Netflix-like” subscription fee.

“As a first place to put money in, it’s an excellent place to be in,” Lintner said of Treasuries. “We built a scalable platform, we can go from zero to 300 million Americans, and do a lot of stuff with absolute stability. Now we can deliver an awesome experience and a number of other features.”