European consumers could save more than £7 billion a year after MasterCard was ordered to scrap charges on cross-border credit and debit card transactions.

Describing yesterday's decision as “a nice Christmas present for all consumers in Europe”, Neelie Kroes, the European Competition Commissioner, gave the company six months to comply with EU rules or face hefty fines.

After a lengthy investigation, she found so-called interchange fee of 1 to 2 per cent that retailers have to pay for each transaction – which they pass on to customers – inflated costs and brought no benefits.

The fee applies on nearly all cross-border payments in Europe, as well to domestic payments in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxembourg, Malta and Greece.

MasterCard sets the fee but the money goes to the banks that issue the cards; Britain's biggest issuers include Royal Bank of Scotland and Barclays. More than 23 billion card payments are made in the EU every year, worth more than €1.35 trillion (£965 billion).

EuroCommerce, the umbrella organisation for the six million retailers that brought the original complaint ten years ago, welcomed the decision.

Feargal Quinn, the organisation's president, said: “This is great news for all consumers in Europe. The outcome could exceed €10billion per annum in the years ahead.”

Sir Terry Leahy, Tesco's chief executive, said: “Tesco pays about £100 million in fees to the banks for processing credit and debit cards – that's £100 million we haven't been able to invest in price, range or service for customers.”

MasterCard said it would comply with the order, but would appeal to Europe's second-highest court to have it annulled.

Javier Perez, president of Mastercard Europe, said he was “disappointed the Commission had failed to appreciate that without a mechanism to fairly share costs, consumers will be hurt”.

The Commission also criticised the level of other fees charged by the card company, saying they were among the highest in Europe.

Mrs Kroes warned MasterCard not to try to make consumers foot the bill in other ways and made it clear that Visa, the other major credit company, should take yesterday's decision into account when its interchange fee exemption ends in ten days.

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