The future of banking might be hiding in Minnesota

About halfway between St. Paul, Minnesota, and Fargo, North Dakota, there's a town called Wadena. According to the most recent U.S. Census Bureau estimate, some 4,094 people live in the Minnesota town. There's a small bank there called Mid-Central National Bank. Historically, it's been where farmers and other locals in the area have stored their money. And although that bank is roughly 1,350 miles from Wall Street and 1,900 miles from Silicon Valley, it may well be the home to the future of banking.

In September, Jiko, a Berkeley-based fintech startup, completed a years-long process to acquire Mid-Central National Bank. It was part of a plan to be able to offer what the company's co-founder and CEO, Stephane Lintner, calls the future of "money storage." Right now, most people store their money with banks or other financial houses in savings, CDs or various other vehicles that allow the banks to lend that money back out to others at a higher rate. If something happens to the economy — say, several banks crumbling, or a pandemic — people might be inclined to pull their money out of their banks to ensure they still have it.

In reality, money at most financial institutions is a sophisticated, complicated shell game, where banks are not really expecting runs at any given moment, allowing them to lend out what they have. This is great for the banks, as it often allows them to make money on both what comes in and goes out of the bank, but if you've checked the return on your savings account recently, you might've realized it's not particularly great for the average consumer. And that was before the pandemic.

Jiko envisions an entirely different approach. Setting up an account on its service doesn't feel particularly different from doing it on any other fintech service: You connect your existing bank account to add funds and go from there. But unlike other fintechs, the money you transfer into Jiko is actually buying fractions of U.S. Treasury bills. The money you hold in your Jiko account, barring potentially a few dollars here or there to round up amounts, is all T-bills. Unlike other banking products, Jiko isn't selling your money to other customers, but instead intends to make money by charging a flat annual fee to those who bank with it. Lintner compares it to Dropbox, but for your money.

With Jiko, there are no stipulations on how many times you can withdraw funds from your account per month and neither overdraft fees nor any fees if you don't put a certain amount of money in each month: There's just the amount of T-bills you've purchased. I put $100 in an account back in March, and when I check it today, it's still there, plus a small amount of interest I've received since then. "It's 9 a.m., and do you know where your money is?" Lintner asked, echoing a common PSA circa 1980s. "Whatever money you have at the bank that's not earning is money that you're not earning."

While Linter's concept made sense to me back when we first spoke at the start of the year, it became far sharper after the pandemic hit. Millions of Americans were out of a job, and antiquated unemployment systems and structures within the government fell apart under the strains of unprecedented demand. A deep economic recession, worse even than the fallout from the 2008 financial crash, is expected to be the lay of the land over the next few years. People who can afford it are likely going to save money as the economic outlook remains uncertain. Jiko's mobile- and safety-first approach may appeal to those who also can't see themselves going into a bank anytime soon, Lintner argued, where your money is effectively housed with the government. "We're all learning that the world is chaotic and scary," Lintner said. "So if you can bring trust and peace to your core money, that will resonate."

After earning a doctorate in computational mathematics from Caltech and spending close to a decade at Goldman Sachs, Lintner saw that there had to be a simpler way to bank. Most traditional banks have been slow to adapt to modern technologies, sticking to antiquated systems in the name of safety. Fintechs, on the other hand, with their simple and start-of-the-art software, have had to lean on large banks to underwrite their services, as they themselves haven't been able to get their own bank charters in the U.S. As a result, consumers are caught having to choose myriad services to replicate the simplicity of the traditional bank, or stick with the old banks and hope their services can keep up — which has been a struggle for some during the pandemic.

To carry out the vision for Jiko, the simplest way forward (which was really not that simple), was for the startup to buy a bank. All U.S. fintechs (well, barring one) that offer financial services do so with the backing of a traditional bank, like Bancorp or Goldman Sachs, as there is no structure in place for them to offer these services without their own banking charter. To acquire a charter, there's really no option other than to buy a bank. So Jiko, with the backers of investors like Upfront and Embark Ventures, set out to acquire a bank.

After about four years of regulatory wrangling and meeting with the board and management of Mid-Central National Bank, Jiko took ownership in September. (One of Lintner's co-founders had been a shareholder in the bank and first floated their ideas to them six years ago.) Mid-Central would go about its usual business, serving many farmers and consumers in the Wadena area, while its new parent, Jiko, could start offering its hybrid brokerage-banking account to customers. It also means that down the road, Jiko could white-label its bank account offering to other fintechs, if it wants to. (Linter said that was definitely a possibility, albeit not Jiko's focus right now.)

Beyond making your money more visible, Lintner envisions entirely new ways of banking that he said can really only be done when you're your own bank. Lintner saw my Peloton bike sitting behind me as we caught up on Zoom, and said that he was on his own that morning. "I really wish I could tip the instructors at the end, they've changed my life," he said, "and for that, you need something that scales that could do micro-transactions and where the money is there [in your account]."

Other innovations Jiko is testing include what the team calls "portals," which are essentially application-specific accesses to a Jiko account for direct deposits or payments. For example, you could open one up to your employer to get your paycheck, or one to Amazon for all the stuff you're having to buy for working at home these days. If someone managed to get a hold of the information on one of those portals, they wouldn't be able to do anything else with it. For freelancers, it could also mean streamlining disparate revenue streams without having to input your bank account details into a bunch of systems.

Lintner said the company is also playing around with the idea of "pockets," where a user could have several different sub-accounts for all the different things they're saving for, from vacations to engagement rings to college. There'd be no more mental gymnastics trying to keep track of where you want to apportion your money; with Jiko, you could just make a new sub-account for that savings plan. Lintner said there's currently about $5,000 worth of T-bills generated per person in the U.S. each year, so for now, there's ample runway ahead.

"Whether we have one user or 300 million Americans who need a stimulus check, we can handle the flow, because we don't depend on capital to shore up the losses on the portfolios of money that we lent out because it's not in the bank," Lintner said.

Jiko is still in early beta, with just a few thousand customers, so it's still figuring out what offerings make the most sense for them. For example, one of the biggest selling points for many fintechs right now is a two-day advance on your paycheck, something Chime pushes heavily in its marketing. That's something Jiko could offer, but as Lintner argued, that's really only marketing, rather than a long-term reason to use Chime or any other fintech offering it. "What's funny is you've got the big banks watching, and it takes them a little longer, but at some point, they have it, too," Linter said. "On the edge, as much as you can innovate, if you're not in the inner circle, and able to hold money, you're just front-running."

Lintner said they'll listen to customers as they add more people to the platform for what features will be important to them. But the core problem for Jiko, or any fintech, is building trust in the platform. "In the end, do people trust you enough with their real paycheck?" he said. His argument for Jiko is that by being its own bank — bypassing and not relying on anyone other than the federal government — puts Jiko in a stable position. The test will just be whether people do start to trust Jiko with their paychecks.

For now, the goal will be to scale up with additional users. The company recently secured $40 million in series A funding, and Lintner compared his plan to Tesla's: "What we've built right now is the roadster, and now we have to turn it into a car that has all the latest features." And much like the selling point of one of Musk's cars, the plan is to make Jiko better over time, with additional features available to members. And for those concerned about the cost of Jiko's brokerage-meets-banking account — roughly $100 per year — Lintner compares that to the upwards of $400 many pay for American Express Platinum and Chase Sapphire Reserve cards, which he says are "useless nowadays" given that so many benefits revolve around travel. And unlike Chime or traditional players like Visa, Jiko plans to refund interchange fees to merchants. "It''s good for consumers, and it's their money," a representative for Jiko told me. "So give it to them."

Given so few of the country's bank deposits actually go through the major banks, Lintner said he sees that there is always going to be a space for traditional banking structures, like the one Jiko bought. "The distribution of the lending risk should be, you're still going to need these community banks and lenders," Lintner said. "It's the money storage at the core that we're challenging and saying can be done differently, to actually help people focus on what they're good at, which is lending."