In the Red: Overdrafts, Payday Lending and the Underbanked

58 Pages Posted: 20 May 2020 Last revised: 7 Apr 2021

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Angela Ma

Harvard Business School; Harvard University, Department of Economics

Emily Williams

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2021

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 their borrowing from alternative lenders. These consumers increase consumption, experience long-term improvements in financial health, and gain access to lower-cost loans in the traditional system. These findings show 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, underbank, underserved

JEL Classification: G21, G23

Suggested Citation

Di Maggio, Marco and Ma, Angela and Williams, Emily, In the Red: Overdrafts, Payday Lending and the Underbanked (April 5, 2021). Available at SSRN: https://ssrn.com/abstract=3599077 or http://dx.doi.org/10.2139/ssrn.3599077

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Angela Ma

Harvard Business School ( email )

Boston, MA 02163
United States

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Emily Williams

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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