Banking on the people’s support

THE British Post Office, with partner Bank of Ireland, took a further step along the road to becoming a neighbourhood bank this week with the announcement of a “major expansion” in the financial products it offers.

The institution, which is keen to cash-in on its reputation as a trusted brand following the banking crisis, plans to branch out into current accounts for the first time.

However, the fruitful partnership with Bank of Ireland could come to an end if the European Commission forces BoI chief executive Richie Boucher to sell off its British assets to gain approval for the transfer of billions of euro in impaired loans to the National Asset Management Agency.

The Post Office will also build on the range of financial services it offers to those on low incomes and people who would be turned away by high street banks.

The group is well placed to offer banking services, as it is estimated that about 99% of the population lives within 5km of one of its 12,000 branches or outlets.

It also serves 23 million customers who make 34 million weekly visits to its branches.

The expansion of the Post Office’s financial services is the latest stage of its transformation to put it on a more sustainable footing.

Attempts to overhaul the Post Office network began in 2007 when about 2,500 branches were closed in an 18-month period, some 500 of which were replaced with outlets that opened on a part-time basis, often in a village hall, church or pub.

The British Government also pledged to invest £1.7 billion (€1.91bn) between 2007 and 2011 to subsidise loss-making branches that had not been closed in order to maintain the network at its current size.

This will be topped up with a further £180m for 2011/2012.

The closures built on an ongoing programme to make the network more sustainable through finding new revenue streams. This led to the introduction of the Post Office’s own-brand financial services products in 2004, through a joint venture with Bank of Ireland. It has also branched out into travel services and telephone products.

The Post Office is one of the fastest growing financial services providers, and is Britain’s largest provider of foreign currency, while it has 2.2m financial services customers and holds £8bn in deposits.

It offers a range of savings and investment products as well as mortgages and insurance.

The latest push into the financial services market will see it “significantly increase” its mortgage lending, with the Government saying it hopes the group will double the size of its mortgage book during the coming financial year, and it will also re-enter the 90% loan to value market.

The Post Office advanced £1bn during 2009, giving it a market share of between 3% and 5%.

It has also announced plans to offer a current account for the first time, as well as a weekly budgeting account, which aims to help people on low incomes take advantage of the discounts available through paying by direct debit.

Other services aimed at those on low incomes include a Saving Gateway account – an initiative under which the Government will match every £1 saved by qualifying people with 50p, while its branches will be used as national distribution networks for credit unions.

As well as offering its own financial products the Post Office also provides banking facilities for people who hold their accounts elsewhere.

Current account holders with 12 banks, including Lloyds TSB and Nationwide, can already pay in cheques, withdraw cash and check balances through its branches, while those with basic bank accounts with 17 banks can make cash withdrawals.

It is in negotiations with Santander, formerly Abbey and Bradford & Bingley, and Royal Bank of Scotland to offer its customers a similar service. If successful, this would lead to about 86% of all current accounts being accessible through post office branches, while it also offers 2,000 free cash machines.

The group’s latest initiative was praised by consumer groups, with Andy Burrows, of Consumer Focus, saying: “It could put banking services back into communities and offer a genuine alternative for low-income customers left behind or turned off by mainstream banks.”

But the Post Office still remains some way off being a genuine people’s bank, as its financial services will continue to be offered through its 50/50 joint venture with the Bank of Ireland, as it does not have its own banking licence.

Bank of Ireland revealed this week it made £20m in underlying operating profits in the nine months to December 31 from its tie-up with the Post Office.

The way the joint-venture operates is a source of tension within the Post Office, with the British National Federation of SubPostmasters urging the Government to rethink the agreement, which sees half of the profits generated through selling financial products handed away.

There is also concern over the fact that Bank of Ireland deposits are not covered by the British Financial Services Compensation Scheme, but are instead protected by the Irish state.

George Thomson, general secretary of the subpostmaster organisation, said: “The Federation believes that a British-backed Postbank model would allow all profits made by the Postbank to be retained by the Post Office, which is by far the best solution to sustain the future of the network.”

But given the complexity of the application process for a banking licence and the onerous capital requirements involved, it is thought unlikely the Post Office will be able to get one in the near future.

Far more plausible contenders for community banking are the imminent new offerings from the likes of Virgin Money and Tesco.

There are signs that the Post Office’s diversification is paying off, with the group posting a near 50% jump in operating profits during the first half of its financial year to £41m.

But challenges remain, with most of this increase due to cost-saving measures, while there was a £35m fall in revenues during the period.

It also reported a further fall in so-called traditional Government business carried out in its branches, as increasing numbers of drivers renewed their tax discs online rather than over the Post Office counter.

In a bid to counteract this, it is pursuing other business opportunities, and is in talks with the Government to play a role in the roll out of ID services.

The group is investing in sophisticated ID verification technology for its 750 busiest branches in a bid to generate additional revenue to support the entire branch network.

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