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