11/25/2009 05:12 am ET Updated May 25, 2011

A Bit of a Break from the Big Banks

Sometimes, the threat of regulation actually works.

This week, JPMorgan Chase and Bank of America both announced changes to their overdraft fees -- an established, if somewhat nefarious, bank practice that has increasingly come under fire during this recession.

For years, banks have charged hefty fees for "overdraft protection," raking in billions of dollars in revenue as a result of confusing and manipulative policies that can leave a customer owing hundreds in penalties for tiny over-drawn amounts. The banks kept claiming that covering overdrafts was a service customers wanted (even though many don't even know it exists or how it works), and that practices like processing the highest expenses first were meant to help customers get their largest, most important bills paid on time -- instead of actually draining their accounts and tricking them into going over the balance.

But these days, that dog won't hunt.

More and more Americans from the rapidly-eroding middle class are becoming low-balance account holders -- traditionally the "LMI" (low to moderate income) segment of working poor folks and people of color that financial institutions have long ignored with impunity. The political environment may be changing as a direct correlation to the level of financial pain being felt.

In the face of rising consumer outcry and outrageous story after story reported in the media, legislators and regulators finally found the political will to make some moves. Rep. Carolyn Maloney and Sen. Christopher Dodd recently revived efforts to restrict overdraft protection to "opt-in" only, while the Federal Reserve let it be known a few weeks ago that it planned to do the same.

Chase and BofA were smart to get ahead of this curve with a preemptive strike on overdraft before the financial regulatory debate resumes in Washington this fall. But in reality, the reforms they made, while welcome, don't go that far in protecting consumers. Besides an "opt-in" and processing transactions chronologically instead of by amount, banks also need to alert customers at their ATM if the pending transaction will result in an overdraft and accompanying fee. As well, they should provide "point of sale" notification by having debit cards be declined if the purchase amount will go over the limit, just like with credit cards.

According to a survey by the California Reinvestment Coalition (CRC), all of California's big banks -- Bank of America, Bank of the West, Citibank, Union Bank of California, U.S. Bank, Washington Mutual (now Chase), and Wells Fargo -- have similar overdraft policies that turned presumably free checking accounts into high-cost, short term loans for customers with low balances. With two of the biggest banks now modifying this exploitative practice, we hope a glimmer of competition will actually encourage other banks to do the same and better.

CRC and our allies have been trying to change banks' bad practices for years. This isn't the first time Chase or BofA have heard consumer complaints about overdraft, but this is the first time they felt sufficiently motivated to do something about it.

Congress, the White House, and regulatory agencies should take note: the credible threat of regulation drives change. Public pressure needs to build if ordinary Americans are going to get more than a small break from the banks.