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Post Office plans for a universal bank are being fought by the banks and undermined by Stephen Byers.

Britain's banks have had a rotten year as far as the public is concerned. Increasingly marginalised on the European and global stage, they have come under fire at home over branch closures and cash-machine charges. They have also faced ridicule and mistrust over the security of the internet-based products in which they have invested so heavily. The banks expect, and receive, no sympathy. Yet they regard the government's plans to preserve the nation's post offices by creating a potential competitor -- and asking them to pay for it -- as the final indignity.

After two months of discussions with banks, who made it clear that they thought it a bad idea, the Post Office has presented to the Department of Trade and Industry detailed proposals for a so-called "universal bank". The bank's roots lie in a report, published last November, from a government-commissioned Policy Action Team. The report called for anew banking service to cater for the estimated 3.5 million British adults without a bank account.

In the spring, in his damning report on banking, the former telecoms regulator Don Cruickshank fanned the flames by raising the question of banks' "social obligation". Soon afterwards, Stephen Byers, the Trade Secretary, endorsed an outline plan for the Post Office to launch a universal bank offering simple accounts for the excluded minority, funded jointly by the government and the banks.

This sought to address as many as four issues in one swoop. It would broaden access to banking services, in line with government policy. Payments to benefit claimants, many of whom have no banking facilities, could be wired directly into their accounts, saving the [pound]400m now paid to the Post Office to handle these payments. It would create a new Post Office business line, in part-compensation for the loss of that income, and so slow down its branch closures. And it would impose a measure of social responsibility on the naughty banks.

The banks quickly rounded on the outline plan, describing it as complex, expensive and unworkable, and pointing out that it duplicated services that they already provided. Byers then undermined the Post Office scheme by telling banks that they would be considered to have fulfilled their social obligations if they had their own no-frills accounts in place by October. Most did not have to be told twice, and are on track to meet that timetable.

They would prefer the issue to disappear. "We'd like to help, but we think there are quicker and cheaper ways to solve the problem than to create a new beast," said the British Bankers' Association, the industry's mouthpiece. One of its suggestions was that benefit payments could be made electronically if both the Post Office and the Benefits Agency join the (bank-owned) Link network of cash machines.

The Post Office plan proposes similarly no-frills accounts to be offered through its branches. The administration would be outsourced to a third party, funded by the government and the banks, with estimated start-up costs of [pound]20m. The service envisaged by both parties is essentially the same -- a simple savings account with no overdraft or loan facilities, but allowing use

of direct debits and standing orders so that customers can use the cheaper payment options that these provide.

The banks have created much of the problem themselves. Many among the great unbanked are those whose applications for bank accounts have been turned down because of low incomes and patchy credit records. If these customers are not lent money, they can't be credit risks. But the real reason the banks don't want them is that they are unprofitable. The cross-selling of banking, insurance and savings products that forms the bedrock of most banks' retail strategies is unlikely to make much headway with them.

Consumer groups argue that there is ample evidence of the banks' animosity to serving this supposed client base. "There is a set of practices designed to push people out of the banking system," claims Teresa Perchard, the head of social policy at the National Association of Citizens Advice Bureaux. Perchard points out that none of the proposed new accounts will offer any loan facilities. This, she says, will leave those on low incomes still unable to fill temporary shortfalls in cash at market rates, forced instead to pay high rates to loan sharks -- one of their greatest problems.

To promote its own project, the Post Office has argued that the type of customer concerned would rather use post offices than banks, about which they have mixed feelings. Basil Larkins, the head of retail network banking at the Post Office, has also suggested that banks are unwilling to take more low-income customers, who would add to branch queues and offer little long-term reward. "I wouldn't want to do this if I were a bank," Larkins told the Financial Times last month, referring to the universal bank plan.

The Post Office points out that it has a greater geographical spread of branches than the banks, and is thus better able to meet the government's social criteria. In response, the banking industry has suggested opening branches in post offices, extending the existing agency agreements that a number of high street players already have. Yet bankers remain uncertain about how far they will have to go to satisfy the government's "social" requirements. "The banks' social obligation remains unclear," says a senior executive at one of the big four high street banks. "There is a degree of nervousness over whether these new accounts will meet the criteria."

According to Perchard, banks are not promoting their planned new accounts very heavily. This is in sharp contrast to their internet services, on which they have spent millions of pounds. Moreover, while they have made projections for their internet products, they have not published any targets for the expected demand for their new accounts.

Then again, the common good is not exactly the Post Office's prime motivation. It has its eye on the [pound]100m in revenues that it hopes to get from a universal bank. This will go some way to filling the hole left when the government introduces electronic benefits transfer in 2003. And, in advancing its cause, it is not slow to raise the spectre of further rural post office closures, which, Larkins argues, must happen without the universal bank business. He knows how politically unpalatable this would be, given the government's commitment to prevent closures.

The tone of the banks has become more resolute since the publication of the Cruickshank report, which was less forceful on their social responsibilities than they had feared. However, the banks must be careful not to do anything that may cause the regulatory goalposts to shift in the future. This alone may save the Post Office plan from embarrassing collapse. Ideally, the banks would like a technology partner to step in to join the Post Office plan, thereby releasing them from all obligation. Failing that, they wish simply to continue creating their own services for low-income customers, without having to contribute to any new bank.

Those services will ear into the customer base of any universal bank, which leaves the plan on Byers's desk somewhat lacking in credibility. What the proposed new bank does have (although we are not permitted prior knowledge) is a New Age name. Even Larkins admits that it is a slightly silly one.

Doug Cameron is a journalist with the Financial Times

Trust me, I'm a banker

There's nothing a bank likes more than enjoying the trust of its customers. Recent attempts by UK banks to widen the scope of that trust have attracted international attention. And failed.

People generally rely on the advice of their bankers in that most sensitive of areas, their personal finances. So it was not unreasonable of NatWest and HSBC's First Direct to think that they might offer advice across a broader spectrum--to include shopping, eating, gardening, DIY and general knowledge.

Last year, as the internet frenzy gathered steam, they each set up a web-based personal valet-type service, which allowed customers to ask questions, sensible or silly. Their experts would then dig up the answers.

The NatWest service was named Zenda. First Direct called its project Octopus. Both charged for their services -- Zenda, a fixed monthly fee; Octopus, a variable charge depending on what you wanted.

The Octopus website (thinkoctopus.com), although it is also contactable by phone, provides examples of the sort of problems you can tire at it. Where can I find a shop selling goods for left-handed people? Give me a Greek restaurant in London that does plate-smashing. What is the name for a group of baboons? (A troop, actually.)