Jiko raises $40 million to become a most unusual challenger bank

October 29, 2020, 2:15 PM UTC

Make way for another challenger.

Jiko, a Berkeley-based financial technology or “fintech” firm, has raised $40 million in venture capital funding in a bid to take on Wall Street’s retail arm. The cash injection, led by Upfront Ventures and investment firm Wafra, follows an initial $7 million debt financing round, putting the company’s total raise at $47 million to date.

Most existing fintech challengers spent years acquiring customers with slick apps and no-hidden-fee promises, only later worrying about offsetting mounting costs of customer acquisition, partly by bringing deposit-taking in-house. Lending Club, an early fintech pioneer, bought Radius Bank for $185 million in February. Startup Varo received a national banking charter this year. Square and, more recently, SoFi got approvals to become banks too.

Jiko took the reverse approach. Founded four years ago by Stephane Lintner, a former Goldman Sachs trader, Jiko set out first to acquire an existing bank before debuting a product. Investors’ funds were held in escrow for two years while Jiko pursued purchasing 63-year-old Mid-Central National Bank, based in Minnesota, a deal it consummated in September.

“A fintech buying a bank isn’t standard, and we spent most of the last few years of our effort on that—the whole round was designed around it,” Lintner told Fortune. “We needed very patient investors.”

A head start (from behind)

The strategy puts Jiko ahead of some rivals in the race to satisfy financial regulators but far behind in luring customers. In the meantime, Chime, another U.S. challenger bank, has been rising in popularity, contributing to its eye-popping private valuation of $14.5 billion. Other challengers range from Monzo to MoneyLion.

Jiko’s unusual, slow-and-steady approach isn’t its only point of differentiation. The firm prides itself on putting all deposits toward the purchase of short-term U.S. Treasury bills. The value of a Jiko account isn’t the potential for high yields—a dwindling fintech battleground amid the Fed’s slashing of interest rates—but the peace of mind in knowing one’s funds are secured with government debt.

“The yield was never the core selling point,” Lintner says. “There’ll be yield when there’s yield, and if there’s not much, there’s not much. Nothing else has much yield right now, unless you go into really risky stuff, which you probably shouldn’t be, right?”

Screenshot of Jiko’s app. Courtesy of Jiko, which notes, “Past performance is not indicative of future returns.”

On top of currently low yields, there’s another hurdle to customer acquisition. Jiko plans to charge people $9 a month, or $100 per year, to maintain an account. By way of incentive, Jiko is offering people 1% in cash-back rewards through an associated debit card issued by Discover.

“Think of it as a membership fee like a Netflix or Amazon Prime,” Lintner says. “It’s up to us to justify that and give you the best experience and a great product. We don’t play games. We don’t sell your data. We don’t charge interchange fees, and the yield is all yours.”

Too big to fail

The danger, of course, is that the upfront cost poses too high a barrier for most people to overcome. Case in point: Quibi, a short-form video app that charged a similarly expensive price, folded in a spectacular flameout this month.

Colin Crook, a public relations professional who represents Jiko and is one of its product’s 1,500 or so initial testers, says a transparent subscription fee is preferable to sneaking in costs later on. Peers that offer a free version at the outset are making “a mistake,” he says, because they will likely have to add fees later, as has happened, to some degree, at Monzo, Britain’s Starling, and Germany’s N26.

Jiko’s focus on government debt comes at a time of strain for central banking. To counter the ill effects of the coronavirus pandemic, the Fed has taken extraordinary measures in support of economic stimulus packages—and alternative investments, like gold and Bitcoin, are soaring.

For Lintner, keeping deposits in debt backed by the full faith and credit of the U.S. government means, for Jiko, failure is not an option. “We’re never going to fail because the money is in T-bills,” he says.