European Union regulators today said they would drop a threat to fine MasterCard after the company promised to temporarily cut fees it charges for cross-border card purchases which can hike costs for shops.

The European Commission ruled in December 2007 that the MasterCard's cross-border multilateral interchange fee (MIF) on its credit and Maestro debit cards, levied on retailers, breached EU antitrust rules and must be changed within six months. MasterCard rejected the ruling and appealed to the European Court of First Instance in a case that has yet to be concluded. It also bumped up its fees last October and reintroduced a MIF.

Regulators say they will now monitor how MasterCard changes the way it charges these fees, which should from July be capped at 0.3 per cent for credit card purchases and at 0.2 per cent for debit card sales. These fees varied in 2007 from 0.8 per cent to 1.9 per cent for credit cards and from 0.4 per cent to more than 0.75 per cent for debit cards.

The fees agreed with the Commission are too low to sustain strong competition in Europe's payments industry or invest in new products for consumers and retailers, MasterCard said. "That is why these rates are only interim, and why we are pursuing our appeal in the European Court of First Instance," MasterCard Europe's president, Javier Perez, said.

"These interim interchange fees significantly undervalue the benefits merchants receive from accepting payment cards, such as a payment guarantee and higher sales than with cash," said Geert Pielage, a spokesman for MasterCard Europe. Cross-border purchases are less than 5 per cent of MasterCard's total payment volume in Europe.

"These fees are simply a hidden source of revenue for banks. MasterCard could not justify their level," EU Competition Commissioner Neelie Kroes told a news conference. She said she saw no need to pursue MasterCard further due to undertakings made by the US company to cut its MIF cross-border transaction fees to 0.3 per cent for credit cards.

MasterCard has also promised to be clearer about how shoppers and retailers are charged for the payment cards they use and accept. The EU executive said shops will be offered and invoiced different rates for the type of card used. MasterCard will also hold back from a new fee system it wanted to charge banks to issue its cards.

She warned that it was still investigating Visa, which was keen to stick to an average 0.7 per cent interchange fee for processing credit and debit card payments outside the cardholder's country. "I have no intention that today's announcement will allow Visa to benefit at the expense of MasterCard," Kroes said.

Retailers, which have dubbed the MIF a tax on consumption, have long campaigned to scrap the fee and reacted with fury, saying the deal kept alive the principle of interchange fees.

"This temporary settlement sends an extremely negative message to everyone in Europe. This decision is appalling and we count on the Commission to win the court appeal," said Xavier Durieu, secretary general of retailer lobby EuroCommerce.

Europeans make more than 23 billion card payments every year worth over €1.35 trillion. EU officials say the extra costs for using cards in another European nation holds back efforts to create a single market out of the EU's 27-member countries. Regulators claim that retailers pass on these fees to customers in the final price they charge - even to customers who pay in cash.