The post office network could face thousands of closures if it loses a vital contract, MPs fear.

The Department for Work and Pensions (DWP) is to decide soon whether to renew a contract with Royal Mail, owner of the postal network, to operate the Post Office card account, a basic banking account for people to receive benefits payments. However, fears are growing that it may give the contract to PayPoint, the operator of pay facilities in shops and garages.

The National Federation of Sub-Postmasters estimates that 3,000 post offices could close because they depend on the account for business, leaving a network of only 9,000. Fresh closures would be a big blow, especially after 2,500 post offices were lost recently in a shutdown implemented by Royal Mail to cut costs.

A report being published today by the Commons Business and Enterprise Select Committee gives warning that the most vulnerable people would be hit hardest if the contract were to go to an operator that is based more in urban areas and lacks a geographical spread. It says that the card account “caters for precisely the people who do not want to or cannot use conventional bank accounts” and adds: “In the very nature of things, they are likely to be poor or elderly.”

The account is used by about 4.3 million people, including 2.3 million pensioners.

Peter Luff (C, Mid Worcestershire), the chairman of the committee, said: “The consequences to the post office network of not awarding the account or only awarding part of it would be horrendous.” Mr Luff also said that the £150 million-a-year aid that is supporting the network could be blocked by the European Union if the account were to be lost. Part of the reason that the aid is allowed is because post offices provide the benefits service.

It is believed that the Government is worried that it could face a legal challenge if it does not award the contract to the most cost-competitive bid.

However, Mr Luff said that geographical access was a key part of the tender requirements and so the DWP could make the decision on that basis.

A decision on the account was due to be made in July. The MPs' report urges the Government to make a speedy decision. It says: “Several months on, no decision has been announced. Moreover, there is speculation that the contract could be split between Post Office Ltd and another provider. This situation is destabilising for the post office network and we are disturbed that the Government has allowed it to continue.”

John McFall (Lab, West Dunbartonshire), chairman of the Commons Treasury Select Committee, has given warning that if the account “is taken away from the post office or given to an alternative provider, then this decision could come back to haunt us ... Consequences for all communities, particularly those in rural and low-income areas, would be devasting.”

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