Consumers are expected to save millions under plans to increase competition between credit card companies and banks.

British customers are paying over the odds for goods as retailers are forced to cover the extra cost of payments made by credit cards and cheques.

Retailers typically have to pay up to three per cent of the value of any transaction for accepting plastic cards.

The "hidden" costs, which are invariably passed on to customers in the shape of higher price tags on goods, are estimated to be worth up to £1.25 billion a year to banks and credit card companies.

But the Government claimed new measures to beat down those costs could see that figure halved.

The measures could also eat into fat profits which banks are making on cheque clearance charges of up to £1 a time and standing order fees of 70p per transaction.

Treasury Chief Secretary Andrew Smith revealed the plans to force financial institutions into giving both customers and businesses a fairer deal, following an 18-month consultation headed by financial services expert Don Cruickshank on behalf of the Government.

Mr Smith wants to see lower charges for not only transactions made by cheques and plastic but also at cash dispensers.

Banks typically charge each other up to 30p per transaction for allowing rival customers to use their cash machines when the real cost may only be around 10p, said a Treasury spokesman.

The move could also see more credit and debit card companies enter the market, as operators are forced to open up the existing transaction infrastructure to new competitors.

Banks and credit card operators will be made to provide customers with clearer information about charges.

The measures will be enforced by the Office of Fair Trading.