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      In the Red: Overdrafts, Payday Lending, and the Underbanked
      08 Feb 2021Working Paper Summaries

      In the Red: Overdrafts, Payday Lending, and the Underbanked

      by Marco Di Maggio, Angela Ma, and Emily Williams
      Low-income customers turn to payday lenders and check cashers for basic financial needs when traditional banks push them out of the system through high overdraft fees and other penalties. Reducing overdraft fees improves consumers’ overall financial health and access to cheaper credit.
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      Author 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.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: December 2020
      • HBS Working Paper Number: 28242
      • Faculty Unit(s): Finance
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      Marco Di Maggio
      Marco Di Maggio
      Ogunlesi Family Associate Professor of Business Administration
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