Can the Post Office deliver its plan to take on banking's big boys?

The high-street institution unveils £180m plans for new financial products, cheap loans and 90 per cent mortgages. Chiara Cavaglieri reports
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The Independent Online

After many well-publicised branch closures, our tired old Post Office is set to be revitalised as the Government unveils plans for the network to launch a range of new financial products within three years.

The Post Office is already a big fish in foreign currency, and offers various savings, insurance and lending products, but it will soon provide first-timer mortgages, current accounts and cheap loans too – picking up business cast aside by retail banks in the credit crunch. In theory, this expansion is great news for consumers. Over 99 per cent of us live within three miles of a branch in the UK, so these measures should ensure banking facilities are more readily available to a wider audience.

"The Post Office is a well-established and recognised brand," says Andrew Hagger from Moneynet.co.uk, "but apart from convenience, will it really be able to offer anything better than the rest of the market in terms of innovative products, pricing and service?"

Most of the products are aimed at helping those who may not be catered for by the mainstream banks, such as a mortgage for first-time buyers with just a 10 per cent deposit, a unique budgeting account, and cheap loans. Other products that could soon be seen in the Post Office network of 11,500 branches include a children's savings account and current accounts for consumers and small businesses.

Altogether, the Post Office will receive government funding to the tune of £180m in 2011/12 to fund the expansion, and the children's savings account will be first to hit the shelves, set to launch within the next 12 months. This should be shortly followed by the 90 per cent loan-to-value (LTV) mortgage. Firm dates for the rest of the product range are yet to be confirmed.

The most popular products are likely to be the Post Office current account and the weekly budgeting account, which will enable low-earners to cut costs by using direct debits to pay for household bills. Negotiations are also taking place to enable Santander and RBS current-account customers to access their accounts at Post Office branches. This would mean that around 86 per cent of current accounts in the UK would be accessible at Post Offices.

Another big proposal is for a link-up with credit unions, funded by a levy on retail banks, to provide access to more-affordable loans. Mark Lyonette of the Association of British Credit Unions says this should go some way towards "reducing financial exclusion and bringing fair and affordable banking services to many more communities".

Finally, a new Saving Gateway account will be launched this year for people on lower incomes, with the Government aiming to encourage savings by adding 50p for every £1 saved.

So far so good perhaps, but experts raise concerns about a lack of advice. Mr Hagger asks: "How many branches will have the capacity and trained staff to be able to deal with current account and mortgage business/queries on top of their existing workload?"

One of the more potentially controversial introductions, for example, is the mortgage product aimed at first-time buyers, with a 90 per cent LTV ratio. "Financial products can be very complicated, so by virtue of the fact that the advice isn't going to be there, they will have to be very simple," says Dan Clayden, from independent financial adviser Clayden Associates.

Another potential stumbling block is that the Post Office will continue to offer these services with its partner Bank of Ireland, which already supplies its saving and insurance products. So worries over Irish banks may be a real concern for some consumers, although savings provided by the Bank of Ireland benefit from 100 per cent protection until September, which is more generous than the Financial Services Compensation Scheme (FSCS).

But above all, the vital question must be whether or not these new products will be competitive – and the good news is that the Post Office has a good track record of providing rates that regularly feature on the best-buy tables.

At the moment, the Post Office Platinum Mastercard charges 16.9 per cent and offers 3 months on new purchases and 0 per cent for 12 months on balance transfers, which fares well against the market leader; that offers 0 per cent for 15 months. And, the Post Office card makes no charge for overseas usage.

The Post Office also appears in the best-buy tables for smaller and larger loans, charging 13.9 per cent from £2,000 and 9.9 per cent on loans of between £5,000 and £25,000. "It's particularly competitive for those looking for loans of £2,000 and £3,000 where it offers the lowest rate on the market, excluding lending website Zopa and existing customer deals," says Michelle Slade, from comparison site Moneyfacts.co.uk. Even more impressive is that the Post Office hasn't changed its rates since December 2008.

But it is a little off the pace for instant access savings, paying 2.10 per cent on its instant saver (including a 2 per cent bonus for 12 months), compared with the market leader, at 3 per cent. Its variable cash ISA pays just 2.25 per cent, compared to the best buy from Santander, paying 3.50 per cent. Its fixed ISA, however, pays the top rate 3.00 per cent for a one-year account which accepts transfers in. The Post Office also tops the best-buy tables for its one-year fixed-rate bond, at 3.30 per cent, and is highly competitive for two and three-year bonds, beaten by ICICI Bank.

Mortgage-wise, the Post Office has struggled to compete of late and although it offers various term trackers and fixed-rate deals, few stand out.

"Up until this time last year the Post Office was quite a big best-buy player in the mortgage market," says Ms Slade. "But it pulled back from this."

New Products in the Post

Weekly budgeting account

So that low earners can access discounts by paying their household bills by direct debit.

Children's savings account

This will be launched in the next 12 months, and aims to encourage children to save at their local branch.

Post Office current account

Savers will be able to access their account from any Post Office in the country.

A Post Office business account

Santander business-account holders will be able to access their accounts at the Post Office, which is exploring the idea of developing a standard Post Office business bank account.

A Saving Gateway account

This is for people of working age on lower incomes, offering a Government top-up of 50p for every £1 saved.

Mortgages

First-time buyers will be able to apply for a loan with a 90 per cent loan-to-value. The Post Office also aims to double the value of its mortgage book in 2010/11.

Cheaper loans

Credit-union services will be available throughout the Post Office network.

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