Around three million people currently use the Post Office card account which enables the Government to use electronic payment for benefits, state pensions, and tax credits.

It could now be facing competition for the first time from US bank Citigroup and bill payment provider PayPoint; a decision over who will be given the contract for the five years from April 2010 is expected from the Department of Work and Pensions in the next few weeks.

The Post Office stands to lose the £1billion a year which it currently generates from the contract, causing the closure of 3,000 Post Office branches as part of the measures to cut costs.

The Post Office card account was introduced five years ago when the Government stopped paying benefits using a payment book and started transferring them money electronically into bank accounts.

While the Government says that it has been satisfied with the running of the Post Office’s management of the card account, it has proven more expensive than it bargained for, and is inviting competition for the contract in order to ensure the best deal for the taxpayer.

“The decision on the card account contract to replace the current Post Office card accounts in April 2010 is of critical importance.” A Royal Mail spokeswoman said. “This crucial decision is clearly central to the future of the branch network and Post Office Limited has submitted a very competitive bid.”

While the Royal Mail has reported a doubling of its profit to £177million in the first half of the financial year, it warned of increasing pressures that it faces from competition and its universal postal service which is making a loss. The number of letters being delivered is also falling by five million a day.

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