When the California cities of San Francisco and Santa Monica passed laws banning ATM surcharges in 1999, most banks actively battled to have it overturned in federal court. But not Washington Mutual (WaMu). It smelled a customer service opportunity.

In October 2000, WaMu became the only top five bank in California to drop surcharges at all of its ATMs. A year later, WaMu followed that up by dropping surcharges at all 225 of its ATMs in Florida.

The bank is now surcharge-free at all of its 1,600 or so ATMs and financial centers in Washington state, Oregon, Utah, Idaho, Nevada, Arizona, California, Florida, and Texas. WaMu plans to open several locations later this year in Georgia that will be surcharge-free as well.

"The move away from surcharges lends a certain 'halo effect' to the bank and its products. We thought it would be the perfect opportunity to prove our customer-first philosophy," said Sheri Pollock, WaMu spokesperson.

With consolidated assets of $223.6 billion, Washington Mutual is the nation's seventh-largest bank, with more than 2,300 locations offering consumer banking, mortgage lending, commercial banking and financial services, primarily to consumers and small to mid-sized businesses.

Most WaMu locations have never had ATM surcharges. WaMu had planned for some time to drop the fees in California, after acquiring Great Western Savings, Home Savings and other California banks, but waited until the system was on a common platform. The ATM controversy in the Golden State turned out to be golden timing for WaMu.

From all indications, customers are getting the surcharge-free message. In 2000 alone, Pollock said that 1.4 million people nationwide closed competitive accounts and came to WaMu. "Our customer surveys indicated that two-thirds of our new checking account customers cited our no ATM surcharge policy as a significant reason why they opened the account, second only to free checking," she said.

WaMu made sure the no-surcharge message was heard loud and clear. When surcharges were dropped in California, WaMu supported the move with billboards and print ads across the state proclaiming "The buck-fifty stops here. Our ATMs are surcharge-free." The company also printed "Hassle-Free Switch Kits," allowing new customers to quickly sign a few forms to move their checking account to WaMu. Kits were available inside branches, and even handed out to customers in line at WaMu's ATMs.

WaMu topped off the program with a heavy dose of corporate goodwill, diverting $1.50 -- the full surcharge amount -- to community-based charities for ATM transactions from Oct. 23-30, 2000.

The charitable program raised nearly $400,000 in donations, which was divided equally among the California Community Foundation in Los Angeles, the San Francisco Foundation, the San Diego Foundation and the Sacramento Regional Foundation.

Banks like WaMu are still the exception and not the rule, said Les Riedl, banking industry analyst and senior vice president at Atlanta-based consultancy Speer & Associates. But he said market pressures may change that eventually.

Riedl cited a number of factors contributing to the surcharge-unfriendly environment. More banks are joining selective surcharge alliances like the Co-Op Network. Transactions per ATM have dropped from an average of about 6,000 to about 4,500. More consumers exercise alternatives such as getting cash back at the point-of-purchase. They carry less cash and make PIN-based debit purchases from their checking accounts.

Apparently, it's taken some in the financial sector a little time to understand the economics of WaMu's surcharge-free policy.  In a recent issue of Financial Services Marketing magazine, Merrill Lynch bank analyst Joy Palmer said, "At first, I couldn't understand how they were going to make it work. It does make sense, though. They aren't in places with ATMs where people use them as transaction centers. They aren't in airports. They're not losing a lot of up-front revenue that they have to capture through volume."

According to WaMu, the "no surcharge" policy is part of a broader drive to be the "Unbank." The company has implemented this customer service strategy while growing tenfold -- from $22 billion in assets to $220 billion in the last five years.

The commitment filters down through much of its product line. For instance, the bank offers "Truly Free Checking" with no minimum balance. Customers can pay extra for only the premium services they want. Free online banking requires no direct deposits. Customers have free, unlimited access to customer service representatives or tellers at financial centers.

The financial centers, which are open from 9 a.m. to 6 p.m. to better accommodate customer schedules, have been likened more to Starbucks Coffee bars than a bank branch, with tellers standing beside customers while they access their information at a kiosk. While children play in the fully-stocked play areas, customers can handle their investment stocks and bonds, apply for loans, make general transactions and even shop for books and other WaMu trinkets -- like the WaMu teller action figure, inspired by the company's wacky ad campaign directed by Christopher Guest.

"The bottom line is we provide individual, responsive service to everyone, regardless of the profitability level of their accounts. Would customers prefer to get their money online, at an ATM, at a branch? That's their decision. We're not going to incent them to limit themselves to one option or another," Pollock said.

Anyone logging onto a WaMu ATM has a startlingly different dialogue with the machines. Instead of the standard "please insert card," customers are greeted with "Hi. How can I help you?" When the computer is processing a transaction, the message reads "I'll be with you in just a minute."

Pollock said the customer-friendly screens were designed to mimic a live teller, and were part of a system-wide series of hundreds of screen changes instituted in October 2000.

The extra effort WaMu has put into its ATMs, even with the loss of surcharge revenue, has paid off, Pollock said.

"Overall, it's been very successful for us. When we made the decision to drop the last of our surcharges, we factored in the increase in interchange revenue and the new accounts generated by the good exposure. It really has been a win, win situation for us."