Canada's major banks and credit card companies have reached a deal with the federal government to cut the fees charged to merchants for credit transactions, sources familiar with the negotiations say.

The voluntary agreement could mean cost savings for up to 700,000 large, medium-sized and small businesses across the country. However, it remains to be seen whether the cuts will translate into savings for consumers.

The deal will result in lower interchange fees charged to retailers and service providers for using credit cards to complete direct transactions, said sources speaking on condition of anonymity because they weren't authorized to discuss the matter publicly. The fees would then be capped for an unspecified period of time.

The agreement comes after years of back-and-forth among retailers, the federal government, banks, credit card companies and the Competition Tribunal. Interchange fees currently range between $1.50 and $3 or more for every $100 worth of transactions, depending on the credit card.

Sources said the voluntary agreement gives price stability to retailers.

Karl Littler, vice-president of the Retail Council of Canada, said merchants would be happy with a self-policing deal.

In an interview with CBC's The Exchange with Amanda Lang, Littler said the cost of interchange fees is pushing up prices for consumers.

"Our issue is the overall cost has been driven up by the profusion of premium cards and now super- premium cards in the mix," he said.

"That’s having a big, big effect. It’s $5 billion in total fees, and interchange fees are the biggest portion — that’s $4 billion a year. That’s a lot of money that consumers are bearing in higher prices," he added.

Littler said the banks stand to lose the most from any deal to reduce fees, as they are the biggest beneficiaries.

"The credit cards do make some money — there is a network fee — but actually most of the money goes to the cardholder’s bank," he said.

"So what happens is when somebody pays with a credit card, the merchant gets a discounted price and the discount is held by the cardholder’s bank. The bank then pays out a certain amount of it in rewards … it’s actually judged to be a very lucrative line of business for banks, even more than it is for credit card companies," Littler said.

The federal Competition Bureau came up with the estimate of $5 billion annually in credit card acceptance fees in 2010 and that figure has likely grown since.

There are roughly 76 million credit cards issued to Canadians, who use them to pay for about half their overall purchases. The Retail Council of Canada says high-cost premium cards have hurt merchants the most. It says a majority of the savings from recent interchange fee reductions in the U.S. were passed on to customers.