By John O'Donnell and Foo Yun Chee
BRUSSELS (Reuters) - Banks will have to limit the fees they charge on card payments under proposals from the European Commission on Wednesday that would also scrap surcharges on shoppers paying with plastic.
The draft law would squeeze an important source of income for banks but should bring lower prices for consumers.
It will also end the practice of bumping up the cost of airline tickets, for example, when consumers use their credit card to pay.
"The interchange fees paid by retailers end up on consumers' bills," said Joaquin Almunia, the European Union commissioner in charge of antitrust enforcement, who announced the measures.
"Retailers will make big savings by paying lower fees to their banks, and consumers will benefit through lower retail prices," he said. The Commission estimates that the new curbs could save retailers 6 billion euros ($7.93 billion).
The rules are a setback in particular for Visa Europe, the European licensee of Visa Inc. that is owned and operated by roughly 3,000 European banks including all major lenders. MasterCard will also be affected.
Visa, Mastercard and bank lobby groups disputed that the new law would benefit consumers.
"Experience indeed shows that merchants do not pass fee reductions on to consumers," said Sebastien de Brouwer at the European Banking Federation.
The UK Cards Association, which represents card issuers in Britain, said they might be forced to introduce new fees to cover their operating costs.
Visa Inc and MasterCard are defending similar fees in the United States where retailers claim they have inflated such costs.
Some cards in Europe, such as branded commercial cards issued, for example, by a retailer will not be covered by the rules. American Express, which operates on a different basis, will also be largely unaffected.
At the moment, banks charge a fee when processing payments using cards that can amount to 1.5 percent of the purchase price.
Under the draft rules, which the Commission hopes will widen retailers' acceptance of cards, that charge would be capped at 0.2 percent for debit cards and 0.3 percent on credit cards.
Once the European Parliament and EU countries give their blessing for the rules to come into force, companies such as airlines would be unable to impose surcharges, saving consumers 730 million euros ($964.94 million) annually.
If lawmakers in Brussels hammer out final details of the rules before European Parliament elections next year, an ambitious goal, the law could be in place in 2015.
The new law would mark the end of a two decades-long battle between the EU's executive, which enforces antitrust rules in the 28-country bloc, and card firms Visa Europe and MasterCard.
Visa Europe has already offered to cap inter-bank credit card fees at the level of 0.3 percent, the same benchmark as competitor MasterCard.
And while consumer lobby group Beuc welcomed the end of what they called "shameless" surcharges, some retail lobbyists said the draft rules limiting interbank fees did not go far enough.
Ruth Milligan of EuroCommerce, a retail lobby group that has campaigned for cuts in the charges, said the fee should reflect the "tiny" actual costs involved.
"It should be a fixed fee," said Milligan. "There is no reason for it to be a percentage fee. Because the electronic system is already in place, it's a tiny cost, something like 1 cent per transaction."
"There has been a political compromise in the Commission with a lot of pressure from the banking sector and the card schemes," she said, adding that the levels of the cap had been chosen without input from merchants or consumers.
The cap, which is in line with measures demanded by the Commission's antitrust officials, will apply initially for cross-border transactions - for example, when an Irish card-holder uses the card in France.
After almost two years, this limit would be extended to the so-called interchange fees on domestic payments using all cards.
(Additional reporting by Laura Noonan in London and Philipp Halstrick in Frankfurt; writing by John O'Donnell; editing by Robin Emmott and Elaine Hardcastle)