The Post Office is spending over £50m to link its systems with High Street banks and pay benefits electronically rather than through benefit books.
The project will allow customers to use their local post office to access bank accounts and withdraw benefits.
The Post Office will spend £46m on a Network Banking Engine, supplied by IBM and including eFunds' Connex and Datanavigator products, running on an IBM S/390 and using resilient Parallel Sysplex architecture as the routing and processing engine.
The system will connect with the Post Office's ICL Horizon computer system, giving customers real-time access to bank accounts.
Trials will take place early next year and the system will be operational by April 2003, according to Graham Halliday, banking partnership director at the Post Office. "It's a very major shake-up," he said.
Customers with existing bank accounts can have benefits paid in directly, and can pick up the money from the Post Office.
But for people who do not have, or are unwilling to have, bank accounts, the Post Office will offer basic card accounts. These can only be used by the government to pay benefits in, and the card can only be used to take money out at the Post Office.
In an eight year "multi-million pound" deal, EDS will develop the card accounts, providing card issuing and electronic benefits transfer, and will run services like opening accounts and sending statements. It will also provide customer relationship management and application processing services.
This is the Post Office's second attempt at using a card to pay benefits. It embarked on the Pathway project with ICL in 1998, part of which was aimed at developing a magnetic strip card for paying benefits.
But that part of the project was cancelled in 1999 after racking up £878m in wasted development costs.
Explaining that using the existing banking system will help the project avoid the problems that scuppered the previous effort, Halliday said: "This is our answer to [the earlier problems] and it will enable us to pay benefits at the Post Office through the banking system.
"This is a totally different proposal [to the benefits card]. The benefits card was developed to pay benefits and was designed in a bespoke way.
"What the government is doing by paying by automated credit transfer is paying into the banking system. It's a different proposition in the way the money flows."
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