In the Red: Overdrafts, Payday Lending and the Underbanked

65 Pages Posted: 20 May 2020 Last revised: 15 Sep 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: September 14, 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 a series of class-action lawsuits that mandated that some banks cease the practice. Using alternative credit bureau data, we find that after banks cease high-to-low reordering, low-income individuals reduce payday borrowing, increase consumption, undergo long-term improvements in financial health, and gain access to lower-cost loans in the traditional financial system. These findings, in suggesting that aggressive bank practices can create demand for alternative financial services, highlight 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 (September 14, 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
United States

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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