Working Paper: NBER ID: w28242
Authors: Marco Di Maggio; Angela T. Ma; Emily Williams
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: overdrafts; payday lending; underbanked; financial inclusion
JEL Codes: G21; G38; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lawsuits (K41) | mandatory changes in bank practices (G21) |
| mandatory changes in bank practices (G21) | changes in overdraft revenues and balances (G21) |
| changes in overdraft revenues and balances (G21) | decline in borrowing from alternative lenders (G21) |
| lawsuits (K41) | decline in borrowing from alternative lenders (G21) |
| lawsuits (K41) | improvements in financial health (O16) |
| improvements in financial health (O16) | reduction in reliance on alternative lenders (G21) |
| lawsuits (K41) | increased consumption of durable goods (E20) |
| lawsuits (K41) | increased consumption of essential nondurable goods (D12) |