In the Red: Overdrafts, Payday Lending and the Underbanked

By: Marco Di Maggio, Angela Ma and Emily Williams

Format:Print
| Language:English

Abstract

The reordering of transactions from “high-to-low” is a controversial bank practice thought to maximize fees paid by low-income customers on overdrawn accounts. We exploit multiple class-action lawsuits resulting in mandatory changes to this practice, coupled with payday lending data, to show that after banks cease high-to-low reordering, low-income individuals reduce borrowing from alternative lenders. These consumers increase consumption, experience long-term improvements in overall financial health, and gain access to lower-cost loans in the traditional system. These findings highlight that aggressive bank practices create a demand for alternative financial services, highlighting an important link between the traditional and alternative financial systems.

Keywords

Overdraft; Payday Loans; Excessive Fees; Underbanked; Underserved; Banks and Banking; Financing and Loans; Customers; Income; Business Processes

Citation

Di Maggio, Marco, Angela Ma, and Emily Williams. "In the Red: Overdrafts, Payday Lending and the Underbanked." NBER Working Paper Series, No. 28242, December 2020. (Revise and Resubmit to The Journal of Finance.)