An agreement between MasterCard and the major banks over card payment charges amounted to a "tax" on consumers, the competition watchdog said yesterday.
The Office of Fair Trading said a collective agreement between the group and the MasterCard Members Forum (MMF) over the fees charged when consumers used one of the cards to buy something breached competition law.
The issue relates to the socalled interchange fee which is levied on most purchases made using a MasterCard as a percentage of the transaction and is ultimately paid by the retailer making the sale.
But the OFT found that the banks were setting the fee too high and were using it to recover costs associated with other things, such as the interest-free period offered on credit cards.
It said these higher fees were being passed back to retailers and as a result consumers, including those who did not use cards issued by MasterCard, were paying higher prices in shops.
OFT chairman Sir John Vickers said: "The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services.
"This unduly high fee was like a tax on UK consumers."
The OFT investigated the interchange fee charged on MasterCard purchases between March 1, 2000 and November 18, 2004.
Since last November the group has introduced new arrangements for setting the fees.
But the OFT said it still had concerns that the fee, which applies only to UK transactions, was still being set to include extra costs.
It expects to start an investigation into the new arrangements unless Master-Card addresses its concerns.
The OFT said the collective agreement between the banks on setting the fee between March 2000 and November 2004 had had adverse effects on competition both within the MasterCard scheme and in relation to other payment systems.
It said it deterred the issuers of MasterCard cards and the banks of retailers, who get the money from the cardholder's bank on behalf of the retailer, from negotiating their own fees.
This in turn restricted competition among banks working for retailers, as the standard cost of the fee affected their charges to retailers.
The watchdog added that the inclusion of extra costs in the fee provided a large flow of revenue to card issuers, as well as the incentive to make cardholders hold on to their MasterCard cards through loyalty schemes, advertising and interest-free periods.
The National Consumer Council welcomed the OFT's decision.
The group's competition expert Alena Kozokova said: "Card interchange fee agreements between banks are a tax on all consumers whether or not they use credit cards, because they push up shop prices as well as card charges. So, this is extremely welcome news for consumers."
But MasterCard said it strongly disagreed with the findings. It said it could lead to reduced services to cardholders and to an increase in cardholder fees and charges.
The OFT is also investigating an agreement between Visa members on UK interchange fees.