The Government should create a set of standards for ‘Budget Accounts’ (jam jars) – which safeguard rental income for housing associations – allowing financial providers to deliver them for tenants in return for initial subsidies.

That’s the conclusion of an in-depth report, commissioned by the National Housing Federation (NHF), into the banking products needed by social housing tenants for Universal Credit.

Given the new need for tenants to receive and pay out large sums of money from next October, appropriate financial products are “crucial” to prevent tenants spiralling into arrears, it warns.

The paper, written by financial inclusion experts Toynbee Hall – which is working with Family Mosaic on the Department for Work and Pensions’ (DWP) housing benefit direct payment demonstration project – says many tenants still receive benefit payments into a Post Office Card Account (POCA), which can’t make outward payments other than in cash to the account holder.

However, the paper says there are discussions within Government that could see the complete phasing out of POCAs and “make the holding of an appropriate account to receive and make payments a requirement of receiving benefit”.

Thus a combination of basic bank accounts, Budget Accounts (jam jars) and pre-paid cards – together with enhanced Post Office services – could provide effective and accessible solutions, it says.

However, with basic bank accounts charging tenants for returned payments, pre-paid cards requiring users to make cash payments or have transactional accounts to load money on them, the paper says a scaled roll-out of Budget Accounts – backed by Government subsidies – is needed.

Despite recent growth in credit unions offering the accounts – which allow tenants to split their balance into “jam jars” for spending, saving and automated bill payment – there were only four “accessible brands” in the market as of last year: Royal Bank of Scotland, the Secure Trust Bank, Spectrum Payment Services and Think Banking Ltd.

As such, it was estimated that only around 150,000 UK consumers were using a Budget Account as of last year. Part of the reason for this low figure, the paper says, “was that the three accessible brands for non-RBS customers were generally unknown to the majority of potential low-income customers”.

The progress towards Universal Credit, however, has prompted more forward-thinking credit unions to develop pilot Budget Accounts – with the fee for such accounts picked up by the landlords, the tenant or both. Examples include: Leeds City Credit Union, Walsave Credit Union (Walsall), LASER Credit Union (Rotherham) and Clockwise Credit Union (Leicester, Leicestershire and Rutland), amongst others.

The paper notes “the mainstream banking sector has yet to make a significant entry into the market”, but that “Barclays and Lloyds Banking Group are both exploring the concept of Budget Accounts”. Mainstream banks’ lack of desire for catering for low-income households is also evidenced by some “downgrading their basic bank account, such as withdrawing free use of ATMs in other banks”.

The barriers to expansion for credit unions and other financial providers entering the market, including bill payment specialists allpay – which is looking to develop such accounts – is development, delivery and marketing costs.

For credit unions, it says, geographical spread can be limited in order to get volume for lower costs. However, research highlighted by the paper, suggests people would be significantly more likely to access and use credit union services if they were available through Post Office branches.

It said the challenge for bill payment specialists like allpay and Paypoint is “to create a holistic payment process which does not require the customer to withdraw large sums of cash from a POCA”.

“Collaboration with the Post Office would seem to be the ideal solution in this case,” it says. Research highlighted by the paper notes that 74 per cent of POCA users surveyed said that a Budget Account accessed through the Post Office would better suit their needs compared to a POCA.

The paper says: “For people with limited financial resources, as with the majority of the population, a trusted brand is key to creating behavourial change. Users need to know that their money is safe and accessible, and that it is not going to get eaten up by unexpected fees and charges.”

It concludes: “Our preferred model for stimulating development would be for the DWP to determine a set of standards for Budget Accounts, allowing eligible providers to provide accounts against these standards in return for initial subsidies. In our view this would best encourage the choice and competition required to produce good outcomes for individual and corporate users.”

David Orr, chief executive of the NHF, said: “The Department for Work and Pensions needs to invest in these solutions to help make the switchover as smooth as possible –  or we could see people getting into real financial difficulty.”