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  • 2020
  • Working Paper

In the Red: Overdrafts, Payday Lending and the Underbanked

By: Marco Di Maggio, Angela Ma and Emily Williams
  • Format:Print
  • | Language:English
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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.)
  • SSRN
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About The Authors

Marco Di Maggio

Finance
→More Publications

Emily Williams

Finance
→More Publications

More from the Authors

    • July 2022
    • Journal of Financial Economics

    The Pass-Through of Uncertainty Shocks to Households

    By: Marco Di Maggio, Amir Kermani, Rodney Ramcharan, Vincent Yao and Edison Yu
    • March 2022
    • Faculty Research

    Esusu: Solving Homelessness Backwards

    By: Marco Di Maggio and Emily Williams
    • 2021
    • Faculty Research

    Friends and Family Money: P2P Transfers and Financially Fragile Consumers

    By: Tetyana Balyuk and Emily Williams
More from the Authors
  • The Pass-Through of Uncertainty Shocks to Households By: Marco Di Maggio, Amir Kermani, Rodney Ramcharan, Vincent Yao and Edison Yu
  • Esusu: Solving Homelessness Backwards By: Marco Di Maggio and Emily Williams
  • Friends and Family Money: P2P Transfers and Financially Fragile Consumers By: Tetyana Balyuk and Emily Williams
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