Bank South Corp. has gone out on a new pricing limb, announcing plans to charge customers who submit handwritten deposit slips and counter checks.

The Atlanta-based company says it is not out to make money from the fee of $1 on each of those transactions. Rather, the bank wants to deter fraud and give customers an incentive to use electronic methods or machine- readable documents that can be processed more efficiently.

The fees are to take effect Nov. 1, and even then they don't apply to a depositor's first two unencoded items in a month.

But by charging for a historically free service - such as the convenience of taking deposits from people who may have forgotten to bring their pre-encoded deposit tickets - Bank South risks the kind of public wrath that First Chicago Corp. faced earlier this year when it imposed charges on some teller transactions.

"This is not about collecting fees," said Bank South spokesman Matt Lewis. "This is about reducing errors, highlighting alternative methods, and increasing customer service."

The $7.7 billion-asset Bank South said its monthly average of 400,000 items that lack magnetic-ink encoding represent 11.5% of branch transactions but are related to 25% of all deposit problems and 11% of fraud.

"Each time an item is processed with handwritten information on it, the opportunity for error and the potential for fraud more than triple," Mr. Lewis said.

The new pricing policy emanated from the bank's "New Ideas '96" reengineering program. With the help of consultants from Furash & Co. and International Shared Solutions Inc., Bank South expects to cut noninterest expenses and boost annual after-tax earnings by $17 million.

When Bank South's new charge was brought to their attention, representatives of the American Bankers Association, Consumer Bankers Association, and Bank Administration Institute could not think of another bank that did the same thing.

"It does seem to be another example of a bank using pricing to try to modify behavior," said Rockwell Clancy, the Chicago-based Bank Administration Institute's managing director for retail banking.

Saddled with high-cost branch networks, banks have been trying to encourage customers to use cheaper delivery mechanisms, such as automated tellers. Raising the cost of routine branch transactions, or lowering electronic-service fees, could accelerate the conversion.

Some experts say First Chicago may have tried to go too far too fast.

"First Chicago's case was a nightmare in terms of public relations, but it was not necessarily out-of-the-box thinking," said Edward Neumann, a senior consultant with Furash & Co. in Washington. "Hundreds of banks charge fees to low-profitability customers using a branch."

Bank South clearly hopes its allowance of two free unencoded items per month will stave off any public backlash. Mr. Lewis said customers are being apprised of the $1 charges during the current account statement cycle.

The bank is pointing to its 267 automated teller machine locations statewide, and to direct-deposit automated clearing house services, as ways to avoid the fees.

"It's not going to impact the bulk of those customers out there, who are doing things the way they should be done," Mr. Lewis said, referring to the preferred preprinted checks and deposit slips. "It will negatively impact the crooks."

"We would be thrilled if we never collected a dime," the spokesman added. That would mean "no one was using unencoded items, lines were shorter, and customers were experiencing fewer errors."

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