The European Commission will propose capping the fees that banks charge to process card payments, according to draft legislation seen by news agency Reuters.

Under the proposals, transaction fees would be limited to 0.2% on debit cards and 0.3% on credit cards.

The proposal stops short of an outright ban on the fees banks charge for processing transactions but it will nonetheless ensure that this cost, which ultimately falls on the card-holder and consumer, is permanently curtailed.

The cap, compared by some European Union officials with the cap on mobile phone roaming fees, will have far-reaching consequences.

Such payments accounting for a total value of purchases of €1.8 trillion in the wider European economic area in 2010.

It will reduce an important stream of revenue for banks.

Currently, the fee can be as high as 1.5% in some countries.

The cap, which is in line with measures demanded by the Commission's antitrust officials to squeeze this money-spinner for banks, will be introduced initially on cross-border transactions, where, an Irish card-holder, for example, pays a bill in France.

After two years, the limits will be extended to so-called interchange fees on domestic payments using all cards.

The draft legislation, which is due to be officially unveiled next week, will first have to be agreed with the European Parliament and EU countries, which means that this roll-out of the cap could begin from roughly the end of next year.

In the proposal, the European Commission also recommends rules that would make it easier for retailers to pick and choose which cards to accept, to allow them offer cheaper options for their customers.

The draft, which has been the subject of a sometimes tense debate in the European Commission among those advocating harsher controls and others opting for a softer approach, may yet change although this is not expected.