1/41 There are so many interesting things to say about the Jiko/Mid-Central deal. Instead of writing some opeds, here’s a thread for Labor Day weekend. #fintech #banking #federalreserve #occ Let’s start with the deal.

2/41 Jiko bought its partner bank. It’s a tiny community bank in Minnesota ($125 million assets). The initial reaction in fintech land was surprise and excitement that federal regulators had approved the first fintech acquisition of a bank.

3/41 This was quickly followed by confusion about why Jiko--whose only known product is T-Bill investments through a broker-dealer attached to bank debit and ACH-- thought a bank charter would help its business

4/41 The OCC was sure excited—Brian Brooks called it a “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.”

5/41 But wait, Jiko said it has no plans to expand deposit taking or lending at the bank, whose existing management insisted to reporters that nothing would change about its small, local community banking business

6/41 So what’s up? It’s pretty simple--Jiko bought Mid-Central have direct access to the payments system as a mandatory Fed member national bank.

7/41 Why is that important? Jiko’s business plan is to create a fast, safe and less expensive way for consumers and businesses to hold money and make payments

8/41 It has spent the last few years building its own payments software platform—completely separate from legacy bank and credit/debit platforms.

9/41 But it has had to rely on a partner bank (the pre-acqusition Mid-Central) to connect its first product—T-Bill-filled brokerage accounts-- to the payments rails using crappy traditional means.

10/41 Post-acquisition, Jiko plans to use its internal systems to process ACH payments for its customers using the bank’s powers and thus eliminate the “tax” it paid to its former partner bank to process payments through that system

11/41 And potentially do more down the line with other investment products and in the payments space. But nothing that involves deposits and loans (i.e. traditional banking)

12/41 So that’s nice but hardly earthshaking. Why should we care? Three reasons.

13/41 First, Jiko has figured out a way for a startup to become an OCC “payments charter” national bank. BUT without any of the legal uncertainty!!!

14/41 Because Jiko/Mid-Central will retain a rump deposit-taking national bank all the thorny legal problems that make the OCC’s authority to approve a separate payments charter for banks questionable just disappear

15/41 The litigation about the OCC’s “fintech charter” proposal (which I think the OCC will probably lose) challenges OCC authority to charter non-depository banks. Basically, no deposits no national bank. It’s an identical problem for the “payaments charter.”

16/41 But not for Jiko, because the rump Mid-Central bank has deposits and will go on taking community deposits up there in the cold forever yah sure you betcha

17/41 Jiko can build a big payments business with all the advantages of direct national bank access to the payments rails and none of the risk that anyone applying for a “payments charter” would take

18/41 And so for that matter can any other startup that buys a little bank. Which brings us to the second point. Jiko also solved the puzzle that has generally prevented venture capital funded companies –especially with two class structures-- from buying banks.

19/41 Jiko created a Fed-approved bank holding company in which its VC investors are not in “control” under the Bank Holding Company Act but the three individual Jiko founders are. Why is that important?

20/41 VC investors can’t be in control and continue their other business because companies that control banks are restricted to financial services activities. Durbin is also often an issue. But individuals can control a bank without this being a problem.

21/41 As @Manatt said: “[it] helped Jiko preserve its dual-class, venture-backed capital structure while at the same time ensuring that only Jiko’s three individual co-founders were deemed to control the bank holding company.”

22/41 I’m not quite sure how @manatt did it but kudos. Lots of future deals will probably use the same structures

23/41 But of course it’s not all roses. This works because the new bank holding company is a single purpose entity with no other business than owning the bank. If it were, say, Amazon or Walmart or Google that owned the holdco, it wouldn’t work.

24/41 So good for startups and not helpful for big companies, but still neat.

25/41 The third reason is kind of fun and has to do with Jiko’s existing beta product and what it may do in the future. More to come in next thread.