The competition watchdog says MasterCard has been taxing shoppers and infringing anti-trust rules through the imposition of unreasonably high multilateral interchange fees.

"The cost of these fees is borne initially by retailers' banks, but is passed on to retailers and, in turn, to consumers through higher retail prices," says the OFT in a preliminary statement. "In effect, these fees act like a tax on retail transactions that is paid by all consumers in shops that accept credit cards."

The decision could cost MasterCard and its member banks millions of pounds in lost revenue. In 2001, purchases in the UK paid for by using credit and charge cards were worth £94 billion, with £30 billion spent on MasterCard branded cards.

Commerzbank Securities estimates that the UK banking industry earned £819 million through interchange fees in 2001. Analysts believe the 1.1% levy currently charged could be reduced by as much as five basis points, reducing industry revenues by about £160 million a year.

The OFT has given MasterCard until spring 2003 to propose changes to the existing agreement with banking members. Failure to do so will result in the regulator taking infringement action against the card scheme.

While Visa recently escaped a similar judgement on cross-border fees in the European Commission, the OFT notes that its ruling applies only to domestic transactions in the UK market.

The card schemes are facing legal challenges on a number of fronts. In the US, the companies are battling a class action lawsuit brought by a powerful group of retailers complaining about debit card charges. They have also lost a preliminary hearing relating to the inadequate disclosure of fees imposed on cardholders for currency conversions.

In Australia, both Visa and MasterCard have formally challenged a decision by the Reserve Bank of Australia to mandate a decrease in interchange fees. The changes in this market have forced banks and retailers to rethink their strategies and look again at the price/performance of customer loyalty programmes and other cardholder incentive schemes.