Credit card users who pay off their balance each month could be hit with an annual fee if proposals intended to cut banking profits are approved in Europe.

UK retailers this week welcomed a breakthrough in the long-running campaign in Brussels to cap or ban the fees paid by retailers and businesses to banks for every credit card transaction.

Visa Europe, which with Mastercard dominates the market, has offered to reduce by around 50% the 'interchange fee' charged by banks to a retailer, depending on its size but typically around 0.9% of the sale.

The probable deal with the European Commission puts pressure on Mastercard, which has been fighting a rearguard action over the issue in the European courts.

Most consumers are unaware of the charges on merchants, which the banks say are needed to cover their costs, but which critics say fund other services such as security, insurance offers and loyalty rewards.

The EC made its first 'antitrust' complaint against Visa Europe, owned by the banks but separate from Visa in the US, in 2008 and two years later Visa Europe cut its debit card fees to 0.2%.

According to the British Retail Consortium, Visa's new offer is "hugely significant and massively positive" for consumers who will benefit from reduced prices.

It has long been a critic of "exorbitantly high fees" charged by banks.

But the UK Cards Association was quick to warn that banks would certainly have to recoup their lost revenue from their customers in new charges for credit card usage.

"Ultimately, consumers will end up having to pay more," says the association's head of policy Richard Koch.

A recent report, commissioned by Mastercard, from consultancy Europe Economics estimated that the "loss" to the banks could be £2.4bn, while big retailers might save £2.2bn with no proof that the savings would be passed on to consumers in lower prices.

It said that when similar changes were made in Australia a decade ago, and then in Spain in 2005, the outcome was a rise in credit card borrowing rates and in card fees.

The report claimed that "cardholder fees would rise by up to £25" – a particular issue in the UK where only 60% of users pay for using their card.

The 40% who pay off their balance every month are effectively subsidised by the banks' charges on cards, overdrafts and other borrowing.

The UK also has a competitive market in 0% balance transfer and purchase deals, lasting up to 27 months, as well as cashback cards and offers, that make it possible to use a credit card for significant borrowings and pay a fee of under 3%.

The cap as envisaged at present would apply only to cross-border transactions within the European Economic Area, as well as the domestic fees charged in 10 other EU member states.

It could, therefore, potentially reduce the cost of using credit cards on holiday abroad.

Joaquín Almunia, the EU's competition commissioner, said the "excellent news" over the Visa Europe proposal marked a major advance in "putting an end to restrictions of competition in interbank arrangements".

Meanwhile, according to the latest figures from the European Central Bank, online credit card fraud continues to be a persistent problem across the continent, accounting for 56% of all card fraud, while cash machine and point of sale fraud is in decline.

Ukash, which has developed a system for online cash payment, says alternative payment methods can benefit buyers and sellers.

Miranda McLean, marketing director at Ukash, said: "As well as protecting consumers and merchants from card fraud, alternative payment methods such as online cash ensure wider social inclusion in the online world. Using cash and shopping online should not be mutually exclusive."

It says independent research identified that nearly a third of online shoppers preferred to pay with cash.

Ukash sells unique codes, in retail outlets including shops, petrol stations and kiosks, which can then be used to pay directly on the websites that accept Ukash transactions worldwide, or loaded onto pre-paid cards and e-wallets.

The maximum single value allowed is £200/€250 and the maximum amount that can be held by an individual customer is £1,000/€1,250. Ukash has 465,000 physical points of purchase and is available in 50 countries.