Banks keep raising service fees to offset declining interest income.

First Chicago Bank raised a lot of hackles in April when it began charging customers $3 for using a teller instead of an ATM. But less widely reported was the fact that California-based institutions such as Wells Fargo Bank and Bank of America for years have been charging certain customers for using tellers.

In fact, banks all over the country have been quietly but steadily instituting new fees and raising pre-existing service fees since 1989, when interest income on loans began to drop. Customers today are paying for a variety of services that were once performed for free, and many customers are responding by transferring their accounts to credit unions, investment brokerages and smaller banks.

Of course, bank officials do not grieve over all their lost customers. Some customers just cost more than they're worth, banking consultants pointed out.

In 1990, aggregate fee income for banks nationwide stood at 1.66 percent of their total combined assets, according to Barry Rubens, president of Santa Monica-based California Research Corp., a banking research firm. By 1994, that ratio had risen to 1.98 percent.

According to figures from the Federal Reserve Board, commercial banks earned about $15 billion in service charge income in 1993, a 50 percent increase from the amount earned in 1989. San Francisco-based Wells Fargo took in $473.2 million in service fees last year, an 11.9 percent increase over 1993, Rubens said. Meanwhile, Los Angeles-based First Interstate Bancorp made $220.9 million from fees, a 15.4 percent increase.

Deposits dwindle

Banks have been raising their fees to offset declines in both interest income on loans and available assets. Some analysts estimated that less than half of all U.S. bankable deposits are held by commercial banks, with the rest being invested in credit unions, thrifts, mutual funds or accounts at investment brokerage houses that offer services similar to those offered by banks.

"We're getting at the point where people are asking what they can get from banks that they can't get elsewhere," said Bill Browning, director of the Southern California financial services industry practice at the Los Angeles office of Arthur Andersen & Co. "In many cases, what banks are focusing on is personal service, which managers of community banks think is the one thing they can give (customers) that brokerage firms can't."

But providing those personal services can be expensive, forcing banks to come up with creative ways of raising fees without driving away customers.

First Chicago created a public relations catastrophe by directly charging teller fees to regular customers. The move resulted in negative headlines in media nationwide, even making waves in Congress. In early May, Rep. Maxine Waters, D-Los Angeles, reintroduced a bill defeated in 1991 that would freeze all bank service charges for depositors with less than $3,000 in their accounts for two years.

Waters, a member of the House Committee on Banking, Finance and Urban Affairs, told a House subcommittee on May 24: "This attempt to squeeze more money from bank customers is an outrage. It is unfair. It is economically discriminatory. It hurts senior citizens. And it should stop."

Waters said she had asked First Chicago's CEO to rescind the bank's teller fee.

Subtle moves

Most banks have been more subtle about service charges than First Chicago, raising fees slowly for things such as ATM transactions - especially those over so-called "foreign" ATMs that aren't owned by the bank. Another subtle strategy used by banks to increase fee income has been to create new types of accounts for which variable service fees are charged based on the amount of service needed or the amount of money in a customer's account.

For example, Wells Fargo has ATM checking accounts with a very low monthly service charge, compared to standard accounts. But if an ATM account customer uses a teller even once in a given month, that customer is assessed a $5-per-month additional service fee. San Francisco-based Bank of America has similar accounts, charging a $2 teller fee to customers with Versateller checking accounts.

The reason these fees have not received the type of negative press coverage First Chicago suffered is that customers were given the option to waive the teller charges by opening a different kind of account with a higher flat, upfront service fee, banking consultants said. ATM accounts with variable fees have been a clever way of effectively raising fees for high-cost transactions without alienating customers, consultants said.

Croaking customers

But other increased charges have been less well-received. For example, many banks in recent years have begun charging bounced-check fees not only to the writer of the check, but to the depositor.

"This is a real PR nightmare for banks," said Warren G. Heller, research director of Veribanc Inc., a Wakefield, Mass.-based bank rating firm. "When customers really croak about it, sometimes they'll waive the bounced-check fee."

But for certain customers, croaking will not help because they are not valued by the bank.

Banks are beginning to devote a great deal of resources into distinguishing profitable from non-profitable customers, said Richard Thomas, a partner at the Los Angeles offices of Deloitte & Touche LLP.

In general, low-income customers who don't take out loans and who maintain low account balances generate little or no income for the bank. And those who request lots of services from tellers can actually end up costing the bank money, Thomas said.

The only viable alternative for banks is to require unprofitable customers to pay for themselves, several consultants agreed. And that often translates into higher service fees.