Jiko, a California-based fintech, has completed its purchase of a Minnesota-based community bank after securing approval from the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank of San Francisco. 

The company, which was co-founded in 2016 by former Goldman Sachs trader Stephane Lintner, bought Wadena, Minnesota-based Mid-Central Federal (MCF) Savings Bank, which is converting to a national bank. Financial terms of the deal were not disclosed.

The transaction, which was first reported by CNBC on Thursday, echoes a move by online credit marketplace LendingClub, which announced in February plans to buy Boston-based Radius Bank for $185 million. That deal, which is still subject to regulatory approval, is expected to close next year.

The Jiko platform is unique in that it doesn't hold customer deposits, but instead keeps customers directly invested in Treasury Bills, which are backed by the U.S. government.

Customers keep the yield on the Treasury Bills, which are liquidated when a person uses a debit card or withdraws cash from an ATM.

Lintner said talks with Mid-Central started organically almost three years ago. One of Jiko's co-founders owns a share of the community bank, he said.

"It's a very stable, clean and traditional community bank — the kind of bank that you have a lot of respect for, and one thing led to another," Lintner said, adding talks with regulators also began about three years ago.

"We realized regulators don’t say no, they just really need to make sure things are safe," Lintner said. "That's an ongoing process. It was exploratory, even for us, because it was helping them figure out how to regulate something like us. I think we've helped move the boundary of what's feasible in fintech now."

Fintech evolution

"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 in other ways,” Acting Comptroller of the Currency Brian Brooks said in an emailed statement.

The deal also demonstrates the value and attractiveness of banks and the federal banking system, Brooks said.

"While two data points don't make a trend, the de novo charter granted to Varo Bank this summer and this acquisition by Jiko should demonstrate the optimism and positive energy for consumers, our economy and the federal banking system," he said.

After a three-year journey that cost nearly $100 million, Varo in July became the first challenger bank to be granted a national bank charter.

Following LendingClub’s plans to acquire Radius, and Jiko's successful acquisition of a community bank, more deals are likely, said Kathryn Judge, a law professor focused on finance at Columbia University. 

"The deal embodies the next stage in the fintech evolution," Judge said, adding that acquiring a bank can provide many of the same gains as a partnership, while allowing the fintech to retain independence. 

"The process of buying a national bank is not easy, and there are a lot of strings attached, so it will not be the solution for every fintech," she said. "For many, however, it represents the best balance currently available."

Jiko’s tie-up with Mid-Central could also help the company launch additional products in the future. 

"Leveraging, and, in this case, acquiring, established banks as an avenue to offer and support more products is a viable path to market for fintechs," said Lane Martin, a partner in the banking practice at consulting firm Capco. "[Mid-Central] in this case offers products which will create more options for greater wallet share by Jiko, beyond its current singular focus on high-yield deposits through its innovative Treasury Bill yield structure."

Martin said it will be interesting to see how the two entities choose to align their IT and operations infrastructures to deliver products to a broader customer base.

"Typically banks with assets at these levels have relatively constrained IT environments," he said. "If Jiko intends to deliver modern and robust personalized offerings to future customers, as is the trend, it's pretty safe to assume there will be significant work ahead to use what exists today from MCF as part of what functions technically tomorrow."

Jiko's journey

Lintner said the startup knew it wanted to be regulated early on, and had weighed other options, such as applying for a bank license, before deciding on an acquisition. 

"Without a license, we would be just another fintech amongst many others," he said. "We decided to buy a bank because it felt better for us, given what we wanted to do."

The 23-person company has been testing its mobile app in beta for the last year-and-a-half and has rolled it out to about 1,500 customers, Lintner said.

"That has been part of the regulatory process, to just to convince ourselves that we knew what we’re doing, and the regulators, too," Lintner said. "Since it's just us with no third parties, any mistake is really on us, which is great because it's efficient, but it's also dangerous and we needed to make sure we did this right."

The company plans to launch the official mobile app within the next three months.

"It will feel like a very modern bank account," Lintner said. "And after that, we'll keep working on the platform angle, because we know that others need what we've built. We'll happily open it up through [application programming interfaces] to third parties who would want to run on this, as well."