Post Office needs universal solution

ALLAN Leighton's appointment as chairman has created a real change of climate at Consignia - or Royal Mail as it will soon be renamed. Previous chairman Dr Neville Bain has gone and chief executive John Roberts will follow. David Mills has been recruited from HSBC in a bid to bring the bureaucratic management of the Post Office into the 21Century - not an easy task.

The recent history of the Post Office could be a business school case study. How to lose £1m a day running a monopoly, with a national franchise and a loyal customer base.

In many rural areas the Post Office is the centre of village life and the only place that can provide basic banking facilities along with the groceries. In urban areas, deserted by the clearing banks, the Post Office is the last link between the inner city population and rudimentary financial services.

How could a business with so many advantages go so badly wrong? The decline started in 1968. In Bootle, Prime Minister Harold Wilson opened what was then the largest computer centre in Europe. It was the official launch of Girobank - 'the people's bank'.

There were then 23,000 post offices in the UK, and Girobank would provide free banking and credit transfer facilities at each for six days a week, in direct competition to the High Street banks. Only a quarter of the adult population had bank accounts, so there was an obvious and attractive market.

But after six months of promotion, only 110,000 accounts had been opened and Girobank was a loss maker for the next seven years. It was sold off by the Thatcher government in 1990 for £112m.

Yet it could have been a success from the start if it had been fully backed by the government. That would have required the Treasury to transact all its business through Girobank, and to transfer the assets of the National Savings Bank.

The Treasury did not agree, probably because Ministers did not want to antagonise the clearing banks, and because the Chancellor believed that he could influence general interest rates by manipulating the National Savings interest rate. Girobank was stillborn, but the invigorating effect its success could have had on the Post Office was lost.

Then in the mid-1990's, the Post Office was offered an exciting and potentially profitable business opportunity. A consortium led by ICL and including De La Rue and Girobank, working with Post Office Counters Limited and the Benefits Agency, was tasked with the design and development of a benefits payment system using a plastic card. Called Pathway and based on a system already running in Ireland, the PPI card project was intended as an ID, as well as the means of obtaining payment across a post office counter.

At the Conservative Party Conference in 1996 Peter Lilley brandished the prototype, claiming it signalled the end of the fraud-ridden and inefficient paper-based system.

ICL set up the pilot project and 35,000 benefits claimants were issued with plastic cards. But the project failed because of conflict between the Benefits Agency and Post office Counters. The Government is still paying Post Office Counters £400m a year to administer the paper-based system that loses an additional £5bn to £8bn a year through fraud.

The national reach of the Post Office, the number of its branches in urban deprived and rural communities, and the trust in which it still is held by its millions of customers, makes it the obvious channel for the achievement of social inclusion.

Perhaps its last chance lies with the so-called Universal Bank, due to begin operating in April 2003, but more likely towards the end of the year.

Universal Banking Services is intended to offer basic banking facilities to those customers who do not have a bank account (believed to be 1.5m) and those who do, but prefer to collect their benefit payments in cash from the Post Office.

Eighteen million people have their benefits paid in this way. The Government hopes that the majority of them will have their benefits paid into bank accounts. Most of the banks have signed up to the deal, and agreed to subsidise its operation to the tune of £180m.

But by the end of the decade the Post Office network is likely to number 12,000 or less. The Government has said it will subsidise about 1,000 in urban deprived areas, while 8,000 will need help in rural areas.

Once again it looks as though the Post Office will miss out on a great business opportunity.

John Caine MBE is chairman of GCI Financial Group Limited.