In the Red: Overdrafts, Payday Lending and the Underbanked

Marco Di Maggio, Angela T. Ma and Emily Williams

No 28242, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G21 G38 G51 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ban
Note: CF
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