Read our analysis of the Post Office banking proposals.

 post office bank proposals analysis 2010 03

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The Department for Business, Innovation and Skills' announcement that they want to significantly increase the range of financial services provided through the Post Office is very welcome. It represents another piece of the bank reform jigsaw, with significant potential to tackle financial exclusion by providing access to affordable credit for poor communities. The proposals would see the Post Office offering a wide range of services to individuals and businesses, making good use of the 11,500 strong branch network that already exists.

There is a strong (but thankfully not exclusive) emphasis on serving lower-income households, in order to address the lack of choice poor communities have had since the withdrawal of many high street banks from deprived areas. The ‘Weekly Budgeting account' may have some of the flaws of the basic bank account [the subject previously covered in the Better Banking Blog], but it would offer some of the discounts from paying bills by direct debit that financial excluded people currently miss out on.

The ambitious plans to establish a national network of credit unions across the UK could offer a popular antidote to the public mistrust and dislike of banks, whilst at the same time providing essential access to affordable credit to those people currently without choice. The proposals therefore have the potential to simultaneously appeal to anti-poverty campaigners and to middle-class consumers searching for more socially responsible alternative providers. It also offers something tangible to rural areas concerned by the recent Post Office closures that has undermined efforts to build strong and vibrant communities. (I realise that these are not mutually exclusive groups, my point is that the proposals have very broad appeal).

The proposals cleverly offer solutions to the withdrawal of retail banks from many areas and the financial exclusion this has exacerbated and to stemming the tide of Post Office closures, protecting the valued focal-hub for community life. It also provides a critical revenue stream to sustain the Post Office network (though there will clearly be some upfront costs, as the £180m of new funding announced testifies.

The Post Office has fantastic infrastructure to deliver financial services, with twice as many branches as all the high street banks combined, 99.7% of the population living within three miles of a Post Office, and 20 million customers visiting every week. This last statistic does raise at least one question in my mind, which is, how can it not be economically viable to run with such a vast customer base? I'm no expert, but shouldn't they be able to generate a similar level of advertising revenue as television companies do with that kind of captive audience?

The proposals link directly to the recent Budget announcement that banks should do more to invest in community finance organisations (Credit Unions and Community Development Finance Institutions), either through a levy or regulation. The cost of setting up the national credit union network is supposed to come from a levy on banks. That is consistent with the outcomes of a Community Reinvestment Act (banks investing in community finance organisations to serve excluded communities) and it may even speed up the process and get money flowing in more quickly. However, most of the details are still unknown and the Budget said only that the government would consult on ways to get banks to ‘make an appropriate contribution to community lenders, through regulatory action or a new community levy‘. No doubt the Treasury has some idea of what the cost of providing access to credit union and CDFIs through the Post Office would be, but so far we don't know enough to be able to comment on the specifics.

One issue, which I'd failed to spot at the time of the Budget, on the possible levy on banks is the focus on retail banks. I'm struggling to understand why, when the financial crisis originated in the investment banking side, politicians would want to focus exclusively on the less-risky traditional retail banks? Surely the investment banks are the ones that need to be reined in, leaving the retail banks to get on with the business of taking deposits and lending out those deposits to businesses and individuals?

Overall, the proposals to establish the Post Office (which we're told is the ‘fastest growing financial service provider') as a major player in the banking sector, could have a major impact on financial exclusion. They would address, at least in part, the lack of competition and choice available to poor communities, provide an alternative to predatory lenders and loan sharks and provide essential access to affordable credit. The proposals represent another important step along the path towards a banking sector that serves social needs. However, they must be accompanied by broader systemic reform to rein in excessive risk taking in financial services and reward more responsible behaviour.

Read our briefing on the Post Office Banking proposals
Read our analysis of the 2010 Budget

Toby Blume

Toby Blume