It is keen to cash in on its reputation as a trusted brand following the banking crisis, and plans to branch out into current accounts for the first time. It will also build on the range of financial services it offers to people on low incomes and those who would be turned away by high street banks.
The Post Office is well placed to offer banking services, as about 99 per cent of the population lives within three miles of one of its 12,000 branches or outlets. It also serves 23 million customers who make 34 million weekly visits to its branches. The expansion of the financial services is the latest stage of its transformation to put the company on a more sustainable footing. Attempts to overhaul the network began in 2007 when 2,500 branches were closed over an 18-month period. About 500 were replaced with outlets that opened on a part-time basis, often in a village hall, church or pub.
The closures built on an ongoing programme to make the network more sustainable by finding new revenue streams. This led to the launch of the Post Office's own-brand financial services products in 2004, through a joint venture with Bank of Ireland. It has also branched out into travel services and telephone products.
The Post Office is one of the fastest growing financial services providers. It is the UK's largest provider of foreign currency, has 2.2 million financial services customers and holds 8 billion in deposits. The latest push into the financial services market will see it "significantly increase" its mortgage lending, with the government saying it hopes the group will double the size of its mortgage book during the coming financial year. It will also re-enter the 90 per cent loan-to-value market.
The Post Office also provides banking facilities for people who hold accounts elsewhere. Current account holders with 12 banks, including Lloyds TSB and Nationwide, can pay in cheques, withdraw cash and check balances through its branches, while those with basic accounts at 17 banks can make cash withdrawals. It is in negotiations with Santander – formerly Abbey and Bradford & Bingley – and Royal Bank of Scotland to offer its customers a similar service.
If successful, this would lead to about 86 per cent of all current accounts being accessible through post office branches. It also offers 2,000 free cash machines.
The group's latest initiative was praised by consumer groups, with Andy Burrows, of Consumer Focus, saying: "It could put banking services back into communities and offer a genuine alternative for low- income customers left behind or turned off by mainstream banks."
But the Post Office still remains some way off being a genuine people's bank, as its financial services will continue to be offered through its 50/50 joint venture with the Bank of Ireland, as it does not have its own banking licence.
Bank of Ireland revealed this week that it made 20m in underlying operating profits in the nine months to 31 December from its tie-up with the Post Office.
The way the joint venture operates is a source of tension within the Post Office, with the National Federation of SubPostmasters (NFSP) urging the government to rethink the agreement, under which half of the profits generated through selling financial products are handed away.
There is also concern over the fact that Bank of Ireland deposits are not covered by the UK Financial Services Compensation Scheme but are instead protected by the Irish state.
George Thomson, general secretary of the NFSP, said: "The federation believes that a British-backed Postbank model would allow all profits made by the Postbank to be retained by the Post Office, which is by far the best solution to sustain the future of the network."
But given the complexity of the process of applying for a banking licence and the onerous capital requirements involved, it is thought unlikely the Post Office will be able to get one in the near future. Far more plausible contenders for community banking are the imminent new offerings from the likes of Virgin Money and Tesco.
There are signs the Post Office's diversification is paying off, with the group posting a near 50 per cent jump in operating profits during the first half of its financial year to 41m.
But challenges remain, with most of this increase due to cost-saving measures, while there was a 35m fall in revenues during the period.