Banking industry figures believe 7.6 million of the 16 million who claim benefits or state pensions already have the money paid into their bank accounts. Under the new rules, the remainder will be able to choose the basic, Post Office Card account, or apply for a “no-frills” bank account with one of the 10 banks and building societies backing the scheme. The Government hopes the Post Office Card account will be fully operational by the end of next year: the banks’ no-frills accounts are available now.Historically, banks have not been keen to give accounts to people on low incomes or with poor credit histories. As basic bank accounts have no overdraft facility, the banks can offer them to almost everybody. Douglas Creighton, 25, has a basic bank account from the Nationwide Building Society. Mr Creighton, from Swindon, is working full-time at a manufacturing company while he saves to go travelling. He opened a no-frills account because at the time he had no credit history, and would not have qualified for a standard account.Mr Creighton has his salary paid into his account, and uses it to pay direct debits, including for his mobile phone.

“The account doesn’t have an overdraft facility, but there are no charges and I can use any cash machine,” he says. He plans to use internet banking to keep an eye on his balance during his travels.So far though, banks have done little to encourage more people like Mr Creighton to become customers One reason is the cost. Banks are reluctant to say how much it costs to provide a current account, but the figure is generally accepted to be around £55 a year. Another estimate suggests that customers have to keep an average monthly balance of £1,000 in their account for the bank to make a profit Few people on low incomes will be able to do this.

As the accounts have no overdraft facilities, the bank will not be able to charge interest or fees. Nor can the bank rely on making its money the way it does from wealthier customers, by selling additional products such as insurance.The cost implications have led to an argument between the banks and the Government, which could yet derail the whole process. In May, the banks signed a memorandum of understanding with the Government, but binding contracts have yet to be signed. Whether they are will depend on how much of the cost is borne by the banks, and how much of the savings from electronic benefits’ payments will go into Government coffers. The Post Office will provide information on the banks’ own basic accounts, and account holders will be able to use post office branches to pay in and withdraw money.

But it is the banks that will pay to set up the Post Office Card account and for providing access to cash at post offices.Suggestions that the Universal Bank could cost £180m have been dismissed by bankers. “The amount we have agreed to pay is massively less than the figure that’s been mooted,” says Tom Harvey, head of external affairs at Nationwide. “But if the Government is going to save £400m, do we have to pay the cost of operating it? The reason we came to the party is that the fundamental political objective is sound.”An official at one of the clearing banks, who preferred not to be named, was even more forthright. “At the bottom end of the market, basic bank accounts are unprofitable,” she says. Her bank is worried that, having paid for the post office account, it will also have to subsidise basic bank account customers. If large numbers of people on lower incomes open basic bank accounts instead of taking the Post Office Cards, the banks will have to meet the costs.