MasterCard Inc. has agreed to reduce its cross-border interchange fees to settle a European Union antitrust case.

The settlement, announced Wednesday, allows the Purchase, N.Y., company to avoid a daily penalty of as much as 3.5% of sales, the European Commission said. MasterCard said that it would trim the charges but that it would continue to challenge the commission's findings in court.

Neelie Kroes, the European Union's competition commissioner, said in a press release, "These undertakings will not only improve the efficiency and transparency of the MasterCard payment card scheme but also provide a fair share of the benefits to consumers and retailers."

Merchants have argued the fee inflates retail prices by as much as $17.8 billion a year, according to the European Retail Round Table, an advocacy group that is based in Brussels and represents companies including Wal-Mart Stores Inc. and Carrefour SA.

The settlement is "progress, but there's a long way to go," Paul Skehan, the group's director, said in an interview. "We question how they came up with the rates."

The commission, the European Union's antitrust authority, said the lower fees will save consumers $265 million a year.

In December 2007 the commission ruled that the interchange fee violated European Union laws against restrictive business practices. It gave MasterCard six months to change the fee. MasterCard suspended the fee in June and began talks with the European Union on a new calculation method.

MasterCard cut the fee to 0.3% of the transaction for credit cards and 0.2% for debit cards. Before it dropped the fees, they had ranged from 0.80% to 1.90% for credit cards and from more than 0.40% to more than 0.75% for debit cards.

MasterCard said the new fees are too low and that it will take its appeal to the European Court of First Instance in Luxembourg.

"These interim fees significantly undervalue the benefits merchants receive from accepting payments cards, and that is why these rates are only interim," Geert Pielage, a spokesman for MasterCard Europe, said by telephone.

The commission said MasterCard will still face scrutiny.

The European Union regulator is working on a study of retailers' cash-use costs. It said the fees set by MasterCard should be in line with these costs.

"There will be a monitory system for MasterCard," Jonathan Todd, a commission spokesman, said at a press conference. "If they introduce new fees, then we will have to check whether they constitute a form of circumventing the December 2007 antitrust decision."

The commission is investigating Visa Inc.'s European licensee Visa Europe Ltd. over a similar credit card fee.

Visa Europe said Wednesday that it cut its interchange fees on March 11 but that is also seeking a settlement with the European Union.

"Visa Europe remains of the strong belief that a negotiated settlement with the commission on interchange is best for the industry," the company said by e-mail.

Kroes said Visa Europe will have to follow the same principles as MasterCard.

"I have no intention that today's announcement will allow Visa to benefit at the expense of MasterCard — we are determined to keep a level playing field," she said.

Visa Europe reduced its fee for cross-border debit transactions to 18 euro cents from 28 euro cents. For cross-border credit transactions the fee was cut to an average of 0.61% from an average of 0.7%.

MasterCard and Visa faced congressional scrutiny in the United States and a Justice Department investigation over interchange in 2007. They are also defendants in a merchant lawsuit claiming the card companies conspired with issuers to inflate the fees.

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