Post Office prays its foray into finance will take off

Melanie Bien asks if the new range of borrowing and savings products will be first class

A bank with 17,000 branches spread across supermarkets, newsagents, Chinese takeaways, vets' surgeries and even an undertaker's - as well as on the high street - is likely to have one that's convenient for you.

And that reach is exactly what the Post Office is counting on when it launches a host of financial products - including savings accounts, credit cards and mortgages - from next year.

The first product due to be launched is an unsecured personal loan. This will be piloted in the Midlands from October. Once the systems have been checked to ensure they are working properly, the loans will be on offer in Post Office branches across the country from January. They will also be available online.

As well as personal loans, the Post Office plans an instant access savings account, motor and life insurance, a credit card, a high-interest savings account and mortgages. Home contents cover, travel insurance, foreign currencies and stakeholder pensions are already available in branches.

Although details of the likely annual percentage rate (APR) on its new loan are not yet available, the Post Office's chief executive, David Mills, admits it won't be the cheapest on the market.

"The principle is that we are going to be middle market," he says. "If we wanted to make losses like Egg, we'd offer cheaper loans. And if we are the most expensive on the market, nobody is going to come to us.

"But if we offer clean [simple] products, I think there is a market out there."

Competition among providers is driving interest rates on loans downwards, but this is a battle the Post Office can't afford to engage in. The Government's decision to pay benefits direct to bank accounts rather than over the counter at post offices is bad news for postmasters. Mr Mills estimates they will lose 40 per cent of their income as the number of people visiting the branches - and purchasing other products while they are there - will fall dramatically. This is why he is determined that the banking side must turn a profit within five years.

Yet the Post Office is wisely intending a softly-softly approach, rather than charging in with all guns blazing. Instead of rushing out a new range of financial products in one hit, it aims to spread out the launches over two and a half years, with one product introduced every six months or so. This will ensure that its 66,000 staff are adequately trained to handle customer queries.

Although staff won't be in a position to give advice - the products are execution only - they will be trained to answer likely questions. They will also be able to help customers complete application forms if they get stuck.

"I would rather launch a product every six months and get it right than do it all at once," adds Mr Mills. "It is very difficult to get staff up to speed on so many products in one go."

The Post Office will rely on third parties to supply its financial products, although they will be branded with the Post Office logo, so customers won't be aware of this outsourcing.

Mr Mills is convinced the new range of products will be successful; with 25 million people visiting a Post Office branch every week, the potential customer base is huge. He uses as his guide the launch of the Post Office's foreign exchange business four years ago. In a couple of months it will overtake Travelex as the biggest provider of foreign currency - a phenomenal achievement in such a short time.

However, the Post Office is facing the problem of how to disassociate itself from National Savings & Investments (NS&I). Although these investments are issued by the Treasury, the Post Office sells 90 per cent of them, giving many people the impression that it issues them as well. And with historically poor rates on NS&I, customers may well think that the Post Office's new products will be similarly uncompetitive.

The Post Office Account, from NS&I, for example, pays 0.25 per cent on balances of up to £500. This falls far short of the best rate on the market: 4.1 per cent on the ING Direct savings account.

The Post Office will continue to offer NS&I products, although Mr Mills reckons the Government may decide to use a different medium because of competition from Post Office-branded financial products. He also argues that the association with NS&I does have its benefits.

"These products are government securities, so they don't pay as high a rate as you would get elsewhere, where you are taking on higher risk," he says. "But people already know they can come and save with us. Our staff are used to handling deposits and large sums of money."