SubPostmasters will attempt to increase pressure on the Government to throw the struggling post office network a lifeline by renewing a contract to handle pension and benefit payments.

Fears are growing in the National Federation of SubPostmasters that the Post Office Card Account contract, which is effectively a no-frills banking facility, will go to PayPoint, the private payment network. PayPoint, which operates in nearly 20,000 outlets, is used to pay a wide range of bills and it runs online TV licensing.

If the Department for Work and Pensions (DWP) chooses PayPoint to run the card account from 2010, the federation believes that 3,000 post offices will shut, due to reduced business and footfall. That would leave the network with about 9,000 branches.

Royal Mail is already cutting 2,500 post offices to try to make the network more viable. The cuts have triggered much local protest, and the federation fears that more closures could severely damage the network.

Concern has been mounting because of the length of time the decision is taking. It was expected that an announcement would be made before the summer recess of Parliament.

But it is thought that a decision could now be made in the next couple of weeks, although the DWP has until early December before it must make a final decision. It has been suggested that the announcement is being delayed until after the Glenrothes by-election on Thursday. The federation will distribute campaign material to all post offices, urging them to put pressure on their MPs to campaign for the card account to be reawarded.

Insiders say that ministers have gone from suggesting that the decision was in the bag for Royal Mail to saying it is 50/50. It is thought that PayPoint has submitted a more cost-competitive bid and the Government is concerned about transgressing European law if it favours Royal Mail.

George Thomson, general secretary of the federation, said: “It would be the ultimate act of betrayal if the Government were to take a short-term measure and not award the contract [to Royal Mail]. Three thousand post offices would be bound to close. What we need is a period of stability for three or four years so that the Post Office can turn itself into a post bank.”

More post office closures would be politically explosive, especially in rural areas. Many small businesses are dependent on post offices and have complained about the contraction of the network over recent years. In 1999 there were nearly 18,500 post offices.

Although the DWP will make the decision on the contract because it administers benefits payments, the fallout of the decision would have to be handled by Lord Mandelson at the Department for Business and Enterprise, which is responsible for Royal Mail.

The impact of the competitive market on Royal Mail is being scrutinised for the Government in an independent review headed by Richard Hooper. Lord Mandelson wants the review's remit to be widened to look at the broader postal market. The impact of the decision over the card account could also be included as the post office network is a crucial part of Royal Mail. Last month the division went into profit for the first time for several years.

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