APPENDIX 5
Memorandum by the Department for Work
and Pensions
1. INTRODUCTION
This memorandum is submitted by the Department
for Work and Pensions (DWP).
Financial exclusion is one of the key factors
in wider social exclusion. In 2002-03 1.9 million households (which
equates to around 2.8 million adults) in the United Kingdom were
without a bank account of any kind. Households that operate solely
on a cash budget are unable to make savings via direct debits
on utility bills; are more vulnerable to loss or theft; and they
are far more likely to use the alternative credit market—and
pay interest many times that of a standard personal loan—often
contributing to spiralling debt.
The majority of households in the UK now have
access to, and make use of, mainstream banking and consumer credit
facilities such as high street bank accounts, credit and store
cards, unsecured personal loans or hire purchase. However, there
are still many people and households who have no access to banking
services and this imposes costs on both individuals and society.
DWP has an important role to play in tackling
financial exclusion but its main contribution to financial inclusion
is focused on improved access to banking and affordable credit.
In line with our wider policy on financial inclusion, the Department
has always made it clear that payment into a bank or building
society account is the best option for the overwhelming majority
of customers. Encouraging benefit recipients and pensioners to
make greater use of existing bank accounts or open new ones is
a key element of the Department's strategy to improve financial
inclusion. It provides people on low incomes with access to savings
on their fuel bills through making payments by direct debits;
the ability to cash cheques free of charge; access to cheaper
credit; and it helps people of working age show employers that
they are "job ready".
The move to Direct Payment and the introduction
of universal banking services, which started in April 2003 and
was completed in March 2005, has resulted in increased customer
choice, is helping to improve financial inclusion and has brought
banking services into many rural/urban deprived areas for the
first time. It has significantly improved access to banking services
to groups who have traditionally been financially excluded such
as the long-term unemployed and Muslim women.
In April 2003, 15 million of the Department's
customers were paid by order book or giro. Now around 16 million
customers have payments made directly into an account and fewer
than 400,000 are being paid only by cheque. Within the Department,
the proportion of customer's benefits paid by Direct Payment has
increased from 43% in April 2003 to around 98%. DWP provided help
and support for those people who needed to open an account for
the first time.
Millions more pensioners, mothers, disabled
people, carers and jobseekers are enjoying the greater choice,
safety and savings Direct Payment brings. The results of independent
research show that there are very high levels of satisfaction
amongst customers who have transferred to Direct Payment with
93 per cent stating they were happy to receive their benefits
in this way.
2. POST OFFICE
CARD ACCOUNT
The Post Office card account is part of the
wider universal banking services scheme, and was introduced in
April 2003 to help support the conversion of some customers from
having their benefit or pension paid by order book to having their
money paid directly into an account (Direct Payment).
The Post Office card account is a simple account
with limited functions. It can only receive payments of benefits,
pensions and tax credits. The Post Office card account does not,
for example, allow customers to make savings on fuel bills by
paying by direct debit; it cannot receive payments of wages; cheques
cannot be paid in; and the account does not pay interest on balances.
For the purposes of defining financial inclusion,
Post Office card account holders do not have access to the same
benefits and savings to those who hold mainstream banking products,
and so are not considered to be financially included ie banked.
Around 3.7 million DWP customers are paid into a Post Office card
account.
Although the Post Office card account was designed
for those who did not already have a bank or building society
account, 70% of people who have opened one already have such an
account. The remaining 30% have shown that by managing to open
and operate a Post Office card account, they should be able to
use other easy-to-operate banking products, including basic bank
accounts, which are widely available and accessible at post office
branches. We also plan to put in place arrangements to provide
help and support for customers to open new bank accounts when
appropriate.
The Post Office card account has allowed some
customers to move from receiving their benefit or pension through
cashing an order book at the post office counter, to getting used
to the basics of banking. In practice, there is no real difference
in accessing money at the post office via a bank account compared
to a Post Office card account. Customers can collect the same
money, on the same day as they do now at the post office, by using
a plastic card and a personal identification number.
Government funding for the Post Office card
account will end in March 2010 as was always planned. We want
people to continue to access their cash at the post office and
are working with Post Office Ltd and other stakeholders on what
options will be available to customers after the card account
ends, including the form of any alternative products to the Post
Office card account. All existing Post Office card account customers
will still be able to use the post office to collect their benefit
or pension if they wish by using a bank account there and Post
Office Ltd will still receive a payment for providing this service.
Around 25 or so different bank accounts can be accessed at post
office branches now, and we hope there could be more in the future.
There is no reason why the end of Post Office
card account funding in March 2010, as always planned, should
automatically lead to post office closures. There is also no reason
why Post Office Ltd should not be able to retain the business
of existing Post Office card account customers if it offers them
the services they want, or, indeed, if it improves on what is
currently available via a Post Office card account through its
own new products.
The rapid pace of change throughout financial
services presents unavoidable challenges for Post Office Ltd,
but also brings opportunities for new business. That is why it
is important that the Government, Post Office Ltd and sub-postmasters
should work closely together to ensure customers are fully aware
of developments, and continue to have a range of choices in how
they access their money. The Post Office is a strong brand, with
a high level of customer loyalty. However, the business still
needs to modernise its services and to be sure it is offering
the best available products to its customers. There have been
claims that there will be significant post office closures or
that customers will no longer be able to collect their benefit
or pension at the post office. Such claims are misleading, are
worrying customers unnecessarily and are not in Post Office Ltd's
own interests.
The contract for the Post Office card account
was signed by DWP and Post Office Ltd in March 2002. It was clear
in the contract that Government funding for the Post Office card
account would only continue until 31 March 2010. The Government
will pay around £1 billion for the Post Office card account
over the lifetime of the contract. The contract also obliges both
Post Office Ltd and DWP to help migrate customers to alternative
accounts during the seven-year period of the Post Office card
account. It costs DWP 1p to make a payment into a bank account
compared to around £1 into a Post Office card account. And
80% of our payment costs go on the 23% of customers who are paid
by Post Office card account.
With four years of the Post Office card account
contract remaining, both Post Office Ltd and DWP now feel it is
the right time to begin widening the choice of alternatives and
helping people to make the straightforward move to new accounts,
both those already available at post offices and those which Post
Office Ltd itself is planning to introduce.
Post Office Ltd itself accepts the limited functionality
of the Post Office card account and that an alternative product
could and should do more to improve financial inclusion, as well
as providing the Post Office with new income. At the Treasury
Select Committee Inquiry into financial inclusion on 9 May 2006,
Alan Cook, the Managing Director of Post Office Ltd said:
"You cannot do much with it at all, you
go to a post office, you take the cash out. If you take too much
out by mistake you cannot put any back in. It literally is an
encashment vehicle. I think we can produce a card account that
has more capability, which would enable you to access cash in
different ways and pay bills. I believe that would be a big step
forward for current customers that we regard as socially excluded
who do not wish to make, for whatever reason, the bigger step
towards taking out a current account. We could produce a successor
vehicle."
We are working with Post Office Ltd to move
people from the Post Office card account into the financial mainstream.
Post Office Ltd has introduced one new savings account, and is
developing other savings and banking products which are likely
to be more attractive to many of its customers than the current
Post Office card account. More can be done for financial inclusion
if these new products are better targeted on the customers without
bank accounts, and perhaps offer some services the Post Office
card account does not, for example, the ability to pay in cash
and cheques.
3. LOOKING AHEAD
Recent discussion has very much focussed on
the end of Post Office card account funding in March 2010. But
this does not mean that customers will no longer be able to access
their cash at the post office or that post office branches will
automatically close. Rather than focus on one particular product
which has served its purpose, we believe we now need to move the
debate forward to look at what arrangements need to be put in
place in the future.
We aim to ensure that every DWP customer who
currently collects their benefits from the post office will still
be able to do so free of charge if they wish—around 25 different
bank accounts can be accessed at post office branches now, and
we hope there could be more in the future.
Customers will be best served if DWP and Post
Office Ltd work together with the best interests of our joint
customers in mind as we develop our plan to move people from the
Post Office card account. Our priorities will be to ensure that
this is a straightforward process for the customers themselves
and to help Post Office Ltd manage the transition from Post Office
card accounts to other products. Post Office Ltd has already introduced
one new savings account, and is developing other savings and banking
products which are likely to be more attractive to many of its
customers than the current Post Office card account.
We accept that there must be appropriate products
in place for vulnerable customers when the Post Office card account
ends in 2010. We are working with Post Office Limited and others
to make sure there are. But Post Office Ltd's own research shows
that Post Office card account customers have differing needs and
circumstances. They range from some vulnerable groups, to those
who do not depend on their pension or Child Benefit but let large
balances build up.
It is very likely, therefore, that we will be
looking at a range of alternative accounts. For some people, using
an existing bank account may well be the right answer. Many of
these can be used at the post office, still generating income
and other business for the sub-postmaster. Most of the big banks
also offer basic bank accounts, which are very similar in day
to day operation to a Post Office card account, and all with post
office accessibility.
Those who allow large balances to build up in
their Post Office card account would be better served by a savings
account, such as the Instant Saver Account which Post Office Ltd
introduced on 3 April 2006. Post Office Ltd will be starting a
three month trial in early July when it will be writing to 10,000
existing Post Office card account customers (with £500+ balance
and who do not make frequent withdrawals) to encourage them to
open one of its new Instant Saver accounts.
Clearly some will still need a product more
like a Post Office card account, because they cannot manage or
do not wish to have a bank account. Even there, we could do more
for financial inclusion if the alternative products were better
targeted on the customers without bank accounts, but perhaps offered
some services the Post Office card account does not, for example,
the ability to pay in cash and cheques.
None of this is going to happen overnight. The
Post Office card account still has several years to run. But the
responsible thing to do now is to start planning for the world
of 2010 and beyond, and this is exactly what we and Post Office
Ltd should be doing, and are doing, as we are contracted to do.
4. PILOT EXERCISES
The Department for Work and Pensions ran a number
of small-scale Post Office card account pilots between 13 February
and 10 March 2006 to test various approaches to moving people
from having their benefit or pension paid into a Post Office card
account to payments into a bank account. Our emphasis was on those
bank accounts which can be used at Post Office branches, to help
Post Office Ltd manage the transition from Post Office card accounts
to other products.
The pilots were designed to gather information
about customer needs to help plan a smooth transition between
now and 2010 when the Post Office card account contract ends.
Our aim was to see how customers would react, including how many
people would continue to use the Post Office, and how much we
can contribute to the wider financial inclusion agenda by encouraging
some people to open a bank account for the first time.
Nationally, the pilots affected less than 1%
of Post Office card account customers. The pilots involved:
— we did not promote the option
to open a new Post Office card account for a small number of customers
making a new claim for Jobseeker's Allowance, State Pension or
Pension Credit;
— we wrote to a small number of
customers paid by Post Office card account asking them to supply
account details; and
— we wrote to a small number of
customers who have one benefit paid into a Post Office card account
and another into a bank account saying that we intend to pay both
their benefits into their bank account.
We have already shared the key findings with
Post Office Ltd to help them identify customer needs as they develop
new savings and banking products which are likely to be more attractive
to many of their customers than the current Post Office card account.
A summary report of the findings will be placed
in the House of Commons Library before the summer recess.
July 2006
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