For decades, retail banking customers have taken comfort in Uncle Sam’s guarantee that their funds are backed by the Federal Deposit Insurance Corp.
Now a venture capital-backed startup hopes to use a different U.S. government guarantee to convince customers that they can collect a better return while their funds remain safe.
Jiko, of Oakland, Calif., plans to launch a transaction account in the first quarter of next year. Customer funds will not be insured by the FDIC; instead, they will be used to purchase short-term Treasury bills.
U.S. Treasuries are of course backed by the full faith and credit of the federal government. Though the bills that Jiko plans to buy will pay a fairly modest yield to depositors, those yields figure to be higher than what most banks are paying on checking and savings accounts.
“Treasuries are a wonderful instrument,” said Jiko CEO Stephane Lintner. “They’re an extremely safe instrument. They’re yielding.”
Customers will have the ability to choose from different durations of Treasury bills, ranging from a week or two up to a year or longer.
Longer-term bills pay higher yields but carry more interest rate risk.
The current yield on a four-week treasury bill is 1.27% and the yield on a one-year Treasury bill is 1.6%, according to the Treasury Department. By contrast, the average rate that banks and credit unions paid on retail savings and money market deposit accounts was 0.07% as of Sept. 30, according to a recent report by Fitch Ratings.
In addition to the yield that customers will collect, the company plans to pay cash rewards of at least 0.5% on all debit card purchases. Lintner predicted that the mobile phone-based account will appeal to consumers who do not currently earn rewards from a credit card — particularly younger, more tech-savvy adults.
The product will look and feel much like a mobile banking account, but without the FDIC’s stamp of approval.
“Will that appeal to everyone? We don’t know,” Lintner said. “We think it’s an interesting product for a certain market.”
Some observers expressed doubt that consumers will forgo the FDIC’s long-established guarantee, and instead turn over their money over to a little-known startup.
“To build up trust would appear to be a hard thing to do,” said Mike Taiano, director of the financial institutions group at Fitch.
Lintner acknowledged the challenge, but he said that the one-year-old company plans to assuage those concerns by becoming a licensed financial institution. That means obtaining both a broker-dealer license and a bank charter, which the company plans to achieve by acquiring an existing bank, he said.
Another question is whether Jiko, which means “self” in Japanese, will be able to become profitable.
For now, the company expects to collect revenue from the portion of debit card swipe fees that does not get passed along to its customers. “I see a significant question about revenue generation from the model,” said Todd Baker, a senior fellow at Harvard’s Kennedy School.
Lintner said that in the future, the firm could generate more revenue by charging customers a monthly fee of a few dollars. “There may be a fee. Ideally there is not,” he said.
Jiko could also earn money by charging other companies to use its technology platform. That technology, which runs on the cloud, is designed to provide improved security for customer data.
Jiko recently raised $7.7 million in Series A funding. The funding round was led by the venture capital firms Upfront Ventures and Radicle Impact.