The European Union's executive arm dropped its case against payment network MasterCard's transaction fees on Wednesday in return for a pledge to cut them, enraging retailers who want the fees scrapped altogether.

MasterCard, the world's second largest credit card network, said its offer to halve the fees was a temporary measure pending a court appeal.

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.

The battle with MasterCard is part of a wider offensive by Brussels to increase economic growth by making goods and services more accessible through cheaper banking and card fees.

Retailers say domestic and cross-border payment card transaction fees in Europe total 12 billion euros a year.

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.

The European Commission ruled in December 2007 that the U.S. company'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.

Kroes said she saw no need to pursue MasterCard further due to undertakings made by the U.S. company to cut its MIF cross-border transaction fees to 0.3 percent for credit cards, or 30 euro cents per 100 euros spent, from July 1.

Fees on debit cards will be cut to 0.2 percent. MasterCard's cross-border fees ranged from 0.8 to 1.9 percent in 2007.

MasterCard said the undertakings were temporary until the court case was resolved, which could take many months.

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.

Kroes said steps taken by MasterCard to slash its fees would benefit retailers and consumers. We will be monitoring implementation closely in coming months, she said.

A probe into rival Visa Europe's (V.N) 0.7 percent transaction fee continues, with the MasterCard deal a template.

I have no intention that today's announcement will allow Visa to benefit at the expense of MasterCard, Kroes said.

MasterCard and Visa dominate cross-border payments, with potential competitors standing on the sidelines until the battle over fees is resolved.

The Commission said MasterCard had also agreed to withdraw from July fee hikes imposed in October 2008 and increase transparency and competition in payment cards.


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.

EuroCommerce's Durieu said a fixed fee of 1-5 euro cents per transaction would still be profitable for banks.

The EU is introducing a single euro payments area (SEPA) so that consumers can make credit and debit card payments anywhere in the 27-nation bloc in euros from a single bank account.

Confusion over the legality of MIF, however, left banks unsure about the business model to use for launching rival cross-border payment card schemes, threatening SEPA's rollout.

In a bid to encourage banks to push ahead with new payment card schemes the Commission said last week that banks could use the MIF on direct debits from an account but only until November 2012, as it did not appear compatible with EU antitrust rules.

Kroes and MasterCard said the company's interim undertakings will help put SEPA back on track but EuroCommerce's Durieu said it would prolong confusion by sending mixed messages.