* EU rules to limit interbank fees on debit, credit cards
* Move will restrict money-spinner for banks, help consumers
* Cap is in line with demands of antitrust regulators
By Foo Yun Chee and John O'Donnell
BRUSSELS, July 17 (Reuters) - The European Commission will propose capping the fees that banks charge retailers to process card payments, according to draft legislation seen by Reuters that will squeeze an important money-spinner for lenders and cut costs for consumers.
The curbs, compared by some EU officials with the cap on mobile roaming fees, would have far-reaching consequences, with such payments accounting for a total value of purchases of 1.8 trillion euros in the wider European economic area in 2010.
The draft legislation, due to be officially unveiled next week, envisages a limit of 0.2 percent on the value of a debit card transaction and 0.3 percent on credit cards. Currently, the fee can be as high as 1.5 percent.
The proposal stops short of an outright ban on the fees banks charge each other for processing transactions but it will nonetheless ensure that this cost, which is ultimately passed on to the card-holder, is permanently curtailed.
The cap, which is in line with measures demanded by the Commission's antitrust officials, will apply initially for cross-border transactions - for example, when an Irish card-holder pays uses their card in France.
After two years, this limit would be extended to the so-called interchange fees on domestic payments using all cards.
The plans will first have to be agreed with the European Parliament and EU countries, which means that the roll-out of the cap could begin from around the end of next year.
The law would mark the end of a two decades-long battle between the EU's executive, which enforces antitrust rules in the 28-country bloc, and card firms Visa Europe and MasterCard .
Visa Europe, which is the European licensee of Visa Inc. , is owned and operated by more than 3,700 European banks.
The draft, which has been the subject of a sometimes tense debate in the European Commission among those advocating harsher controls and others wanting a gentler approach, may yet change although that is not likely.
In the proposal, the European Commission also recommends rules that would make it easier for retailers to pick and choose which cards to accept, which would cut their transaction costs.
Currently, the "honour all cards" rules require merchants to accept all products issued by the same card company, even if the fees for these cards vary.
Visa Europe has already offered to cap inter-bank credit card fees at the level of 0.3 percent, the same benchmark as competitor MasterCard.
In its legislative proposal, the European Commission is scathing of the practices of the card companies.
"Competition between card schemes appears ... to be largely aimed at convincing as many ... providers as possible to issue their cards, which usually leads to higher rather than lower fees," officials write in the document.
"Consumers tend to be unaware of the fees paid by merchants for the payment instrument they use."