Hold-up at the bank

The government expects that four out of five social security benefits will be paid direct into bank accounts by 2005, compared with two in five today.

The target will only be met, however, if people can actually get the banks and other financial institutions to let them open bank accounts. Many clients of social services departments in particular will be unattractive to the major banks – young people, homeless people, those with a mental health, drug or alcohol problem and so on.

For this reason, banks have been having their arms twisted to provide what are known as “basic bank accounts”. The Post Office has also entered into a partnership agreement with 13 banks to act as agents for these accounts, so that claimants will be able to access their money through their local post office. In addition, the Post Office will offer its own card account.

The Financial Services Authority (FSA) is now issuing a leaflet, No Bank Account, which is going out with many benefit renewal claim packs. An up-to-date list of which bank is offering a basic bank account is also available on the FSA website: www.fsa.gov.uk/consumer.

However, there are concerns about these new accounts. One of the most pressing problems is that the banks themselves seem unwilling to promote these accounts – or even acknowledge that they exist! One social worker recently told me of her attempts to open a basic bank account for her client. The local branch denied all knowledge and then, grudgingly, admitted it had some leaflets about basic bank accounts “down in the basement”.

This anecdotal evidence is backed up by the FSA itself. In a “mystery shopper” study, a number of low-income customers tried to open bank accounts and not one was offered a basic bank account. Worryingly, some were offered credit facilities and credit cards, which they would have been in no position to repay.

The banks are worried about these accounts, too. They are concerned that it will be their staff who take the brunt of the anger from benefit claimants if payments are stopped or delayed. Of course, as the basic bank account holders will generally be on a low income anyway, the banks also know that they will make no money from these accounts. Nor will they be able to sell the add-ons such as mortgages, loans or insurance where they make a large part of their profits.

Basic bank accounts will not offer overdraft facilities, so careful money management will be a prerequisite for avoiding problems. If direct debits from the account are refused due to lack of funds, for example, the client will still be liable for penalty charges, which could wipe out most of their next benefit payment.

If claimants do not want, or cannot get, a basic bank account, they may turn to the post office card account. But the Post Office account will not accept deposits other than benefits. It will be accessed by a swipe card and a PIN number.

And we still do not know how staff such as home care workers or managers of residential homes will be able to safely cash people’s weekly benefit if their money is in basic bank accounts or post office card accounts. These are issues that must be resolved soon.

Gary Vaux is head of money advice, Hertfordshire Council. He is unable to answer queries by post or telephone. If you have a question for him please write to him c/o Community Care.