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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

    • February 2023
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    Adyen: Reshaping the Payment Ecosystem

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    • January 2023
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    Lupoli Companies: Riverwalk - Making an Impact

    By: Richard S. Ruback, Marco Di Maggio, Dave Habeeb and Ruth Page
    • November 2022 (Revised December 2022)
    • Faculty Research

    Ava Labs: Navigating the Next Blockchain

    By: Marco Di Maggio and Wenyao Sha
More from the Authors
  • Adyen: Reshaping the Payment Ecosystem By: Marco Di Maggio, Antonio Moreno and Elena Corsi
  • Lupoli Companies: Riverwalk - Making an Impact By: Richard S. Ruback, Marco Di Maggio, Dave Habeeb and Ruth Page
  • Ava Labs: Navigating the Next Blockchain By: Marco Di Maggio and Wenyao Sha
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