Girobank - Uncertainty and The "Green Light"

Uncertainty and The "Green Light"

The early years of the National Giro were unprofitable. This was hardly a surprise given that a huge amount had been invested in establishing a service infrastructure that began with zero customers. Similar types of enterprise such as the credit card operator, Barclaycard, would also take many years to begin to build a base from which to begin recouping both capital and labour costs. Nevertheless, the largely middle class press led by the Daily Telegraph and the Daily Mail were hostile to the creation of the National Giro as were the banks, which saw it as a long term threat. When a Conservative government came to power in 1970, there were pressures on the government to close the still loss making operation.

The Post Office made a strong case for adding new services that could transform the financial viability of the operation. Essentially, it proposed that it tackle both the income and expenditure side of the business.

• On the expenditure side, it would limit the growth in staff by limiting the plans for expanding the personal customer base. As this grew, transaction costs grew (including the cost of remitting all those daily movement statements). Advertising ceased and charges were introduced that would discourage further growth in the personal giro account business.

• It also proposed that the government itself should start using the Giro by making social security payments through the service. As most people still did not have bank accounts, this led to the birth of the girocheque, a payment instrument exchangeable at the Post Office for cash, but equally capable of being paid into any bank account.

The biggest change, however, took place behind the scenes. Instead of focusing on the needs of the utilities (which had by this time already adopted the Giro) and the personal banking market, the National Giro would aim to capture the cash deposit business then dominated by the commercial clearing banks. The Post Office itself was a major customer of the commercial banks. It had a constant need for cash in order for it to pay out social security payments (welfare payments and pensions). Bank notes and coin had to be obtained from the banks which charged a fee for this service. The banks were also charging the depositors of these notes and coin, all of which needed to be counted before being passed on to the Post Office (which itself then had extra costs in counting the money provided by the banks. The new system was brilliantly simple. Large depositors of cash (supermarkets, petrol (gas) stations etc.) would be encouraged through pricing to pay their cash into the Post Office. Post Offices are more convenient and open longer hours so there was a natural case for choosing the Post Office. What's more, the depositor would count the money once and seal it discrete envelopes of say, units of £100, £500 or £1000. The Post Office would take the money on trust, but commit to counting it not on receipt, but within a fixed period, of say 5 days. Thus within the Post Office, money could be handled very easily and its source was clearly marked. The money would be counted at the time it was needed (i.e. when the envelope needed to be opened). Discrepancies were reported to the Giro, so that any attempt at systematic fraud could be easily identified. And the Giro could charge both the depositor for the deposit and the Post Office as an internal charge for the provision of the cash. As these charges were lower than those being charged by the commercial banks, everybody was happy. The Post Office internal handling of cash also became much simplified by the handling of fixed value envelopes.

The government accepted the plan, and after a great deal of uncertainty the National Giro got its long awaited "Green Light".

The new plan was a great success and provided a firm financial foundation for its operations, although at some cost to the great plan to move the country over to using the Giro for remittances instead of the banks.