Work and pensions secretary James Purnell has told the Commons that the Post Office is to be awarded the contract for the Post Office card account, saving many branches threatened with closure.
Purnell said the award of the contract - which will initially run from April 2010 to March 2015 - would "disappoint" bidders who had reached the final stages of the competition.
But Purnell said: "These are exceptional times, and we believe this is a proper and proportionate response."
Subpostmasters, union leaders and MPs had warned that thousands of branches would close if the contract was given to a rival firm.
The contract for the Post Office card account was put out to tender, with PayPoint and another firm expressing an interest.
The Federation of SubPostmasters said 3,000 branches would close if the contract was not renewed, while leading Labour MP John McFall warned it could be double that.
The card account contract runs out in 2010 and an announcement had been expected in the summer. The delay fuelled speculation that a rival firm would be given the work.
Two million people signed a petition and 265 MPs from all parties signed a parliamentary motion calling for it to stay with the Post Office.
Earlier this week Purnell told MPs a decision would be made "very soon", but stressed that he must first go through all the necessary procedures.
He told the House of Commons: "The decision has to be taken in due order and I cannot take a decision before all the necessary options have been completed.
"The worst possible thing would be to take a decision which then got unwound."
Stakeholder response: Age Concern
Gordon Lishman, director general of Age Concern, said: "This is not just a win for the Post Office, it's a win for the two million pensioners who have a Post Office card account and the many more for whom their local post office is a lifeline.
"Many older people rely on the post office as a one-stop shop to not only access cash and benefits but to pay bills, get advice and information, and socialise.
"This announcement has averted a further decimating round of closures and will allow older account holders to continue to benefit from the secure service and access to highly trained staff that they currently value."
