In the Red: Overdrafts, Payday Lending and the Underbanked
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.
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Copy CitationMarco Di Maggio, Angela T. Ma, and Emily Williams, "In the Red: Overdrafts, Payday Lending and the Underbanked," NBER Working Paper 28242 (2020), https://doi.org/10.3386/w28242.
Non-Technical Summaries
- After a ban on high-to-low ordering of debit charges, micro loans from alternative lenders in zip codes with below median income fell...