OCC conditionally approves subprime issuer Mission Lane for first CEBA card-bank charter in 20 years

A bank chartered under the 1987 Competitive Equality Banking Act may not accept demand deposits. It may take savings or time deposits only in balances of $100,000 or more, unless a smaller balance is pledged as collateral on a secured card ^[11]. "The cheap deposit funding that a full-service bank charter would offer isn't available," Evey Guo, a principal at FS Vector, told American Banker ^[12]. Her case for the trade comes with a condition: "But for a business built entirely around credit cards with established non-deposit funding sources, that's a rational trade" ^[13]. The report does not say what Mission Lane's non-deposit sources are or what they cost.

So Mission Lane funds itself the same way it did before Friday's decision letter ^[1]. Even the large deposits the law allows need FDIC insurance, and the company is still waiting on that approval ^[14].

Guo listed what the charter does buy: "direct card issuance without relying on bank partners, full national bank preemption with rate exportation authority that isn't subject to state opt-out and no bank holding company status for its parent" ^[10]. Mission Lane will keep its focus on subprime cards ^[5] and wants the charter to carry it past its current 45-state footprint ^[8]. For that lender, rate exportation is the item that matters most.

Mission Lane also skips parts of a full bank's structure. Its parent does not become a bank holding company ^[10], and the bank will run from a main office in Richmond, Virginia, with no physical branches ^[4]. Its lending stays narrow as well: a CEBA bank cannot make commercial loans other than credit cards for small businesses ^[11].

The sponsor banks lose the most. Mission Lane issues today through TAB Bank and WebBank ^[7]. The OCC letter says that during the bank's first three years "Mission Lane will transition its existing credit card program to the bank, and the bank will become the sole issuer of Mission Lane-branded credit cards" ^[6]. At an even pace, that moves about 1 million of its almost 3 million customers a year ^[1]. TAB Bank and WebBank did not immediately respond to American Banker ^[16], and Mission Lane said it remains "committed to a seamless transition with their full support" ^[17].

The last new charter of this type that Klaros found lasted 17 years as a separate bank before a full-service bank absorbed it ^[2]. From here the charter can go three ways. In the first, the FDIC insures the large deposits and other card-only lenders copy the route. Klaros partner Michele Alt, whose firm advised on the application ^[2], argued for that version. "The conditional approval should dispel any concerns about the OCC's receptivity to chartering banks that focus on the needs of underserved consumers," she said ^[15]. In the second, the FDIC takes its time, and Mission Lane holds a conditional approval while the sponsor-bank programs keep running. In the third, the insurance comes through and deposits of $100,000 and up stay a small part of how the card book is funded.

I'd expect the third, because Guo's argument assumes the money comes from somewhere other than deposits. The view is wrong if, once the FDIC signs off, large insured deposits become a real share of Mission Lane Bank's funding and its cost of funds falls.