Are bank customers entitled to use tellers free of charge? That question may pale in comparison to the budget debate in Congress over government entitlements like Medicare and welfare, but they share a common thread. A great many customers want unlimited access to live tellers, and they don't want to pay for it. Indeed, they consider it an entitlement.

First Chicago Corp. rediscovered this truth the hard way recently when it introduced a new pricing system for its checking account customers in the Chicago area. The bank offered free unlimited check writing, as well as free unlimited use of its 500-plus ATM network and 24-hour telephone service, and a free ATM card. It also dropped its fee for deposits made at an ATM. However - and herein lies the tale - the bank said some customers would be charged a $3 teller fee depending on which option they selected or their level of account activity.

Reaction to First Chicago's move was swift and often virulent. The bank was blasted by the Consumer Federation of America and Rep. Maxine Waters of California, lampooned by talk show host Jay Leno and targeted by hungry, competitors in Chicago. Robin Foote, a senior vice president for marketing, concedes there has been some customer attrition, "but I think it's within reasonable limits."

First Chicago took this step believing it was necessary to realign pricing with costs. This is an issue of fundamental importance in banking nowadays. The traditional branch operation is an expensive distribution system that doesn't pay for itself in the long run. The costs of processing, say, a $100 deposit through a teller is higher than through an ATM. And if customers don't keep high-enough average balances in their various accounts, they become money-losers. By charging a $3 fee in certain instances, First Chicago had hoped to alter this economic calculus.

Foote complains that what's really happening here is that customers who maintain high balances are paying for those who don't. "There's a tremendous subsidy going on in the banking industry today," she argues. "They subsidize people who keep low balances and choose to do all their transactions in person."

Other banks have chosen to attack the problem differently. In what Foote candidly admits is "fabulous public relations," Citicorp announced its own new program within a month of First Chicago's. The bank dropped most fees for electronic banking, including ATMS and various forms of home banking. Unlike First Chicago, Citi is not charging a separate teller fee.

The bank knows first-hand the dangers of fooling around with teller access. Some years ago it tried to limit the access of low-balance customers to tellers, but ultimately backed down in the face of criticism.

Citi, whose own attempts to limit teller use-age bombed years back, hopes this latest move will give it an edge in the greater New York market, where it ranks number two behind Chemical Banking Corp. "We expect to gain new customers, as well as have people bring (more) business to us," says marketing vice president Karen Green.

Fleet Financial Group, the largest bank in New England with 850 branches and 1.5 million customers, likewise does not try to encourage customer migration to less costly electronic transactions through punitive pricing schemes. Anne Slattery, a senior vice president who oversees Fleet's retail operation, says the demographic composition of its customer base is so diverse that it must provide unfettered access through all channels - including tellers. "Some [banks] want everyone to migrate to electronic," she says. "That's not our bias."

Another solution would be to raise the branch's profitability by making it a more effective sales mechanism. "I think this shows that customers really like their branches," says Geoffrey Nicholson, a vice president with the Boston Consulting Group. "It doesn't take a lot of (extra) product sales to make up the $3."

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