Mastercard and the banks issuing its credit cards have been overcharging their customers, according to the Office of Fair Trading (OFT).
The fee levied on retailers to recover the costs of the card system was too high, the watchdog says.
Consequently, all Mastercard purchases in the UK between March 2000 and November 2004 were overcharged.
Mastercard has since changed its fee charging practices, but the OFT says it might still face a mammoth fine.
The OFT found that the so-called interchange fee had been deliberately set too high so that banks issuing Mastercards could recover some extra costs, such as those of offering standard interest free periods.
The scale of the overcharging was highlighted by the fact that in the year 2004 alone, UK Mastercard users spent £43bn in 700 million separate transactions.
The interchange fee paid to the banks by the retailers averaged around 0.9%, or £400m.
Sir John Vickers, OFT chairman, said “this unduly high interchange fee was like a tax on UK consumers.”
Also, the OFT said, the collective agreement between Mastercard and its banks meant that they were deterred from negotiating their own, lower fees with shops and their credit card companies.
The excessive charge was simply passed on to retailers who, in turn, recovered it by raising the prices in their shops.
Mastercard denied that its deal with its issuing banks was against the public interest.
“Mastercard plans to appeal against the OFT’s decision. For the OFT to claim that the interchange fee agreement either reduced competition or disadvantaged consumers or retailers is simply wrong,” the company said in a statement.
“Today’s OFT ruling is bad news for both healthy competition and the economy” said John Bushby, general manager for Mastercard in Northern Europe.
The OFT’s ruling was welcomed by the National Consumer Council: “Card interchange fee arrangements between banks are a tax on all consumers whether or not they use credit cards, because they push up shops’ prices as well as card charges.”
Both sides may be planning further action.
The OFT says it is not happy with the new fee arrangements that Mastercard introduced last November.
It has threatened another investigation unless the company could show that the new fees were not still being used to recover extra costs.
If found guilty once more then the OFT could fine Mastercard up to 10% of its annual worldwide turnover.
The regulator is also investigating the rival Visa credit card system over precisely the same issue, and has hinted strongly that it would treat Visa in exactly the same way.