According to the Bundle Report 2010, the average US household spent $37,782 in 2009 on expenses other than mortgage or rent. One of the articles in the report shows how the top US cities compare in the average spending. Austin, TX is the highest with $67,076. The next two are Scottsdale, AZ at $64,687 and San Jose, CA at $59,022. The lowest spending city is Detroit, MI at $16,446.
There are also a lot of other interesting spending stats in the report, but I found the average household spending the most interesting since this is relevant to high-yield reward checking accounts. With the monthly debit card usage requirements, banks are hoping the average customer will use the debit card for the majority of their purchases. With each debit card purchase, the banks gets about 1.75% of the purchase through interchange fees. As I showed in my post on the math behind reward checking, debit card usage is one of the important features that allow reward checking to pay out the high interest.
Let's do the math again based on the average spending mentioned in the report. Let's assume half of the yearly purchases is made with the debit card. The bundle.com site does not currently have data on average savings (the site says they plan on having this soon). So for simplicity, let's assume the balance of an average reward checking customer is $10,000. And let's assume a 4.00% interest rate if monthly requirements are met.
- Total yearly debit card purchases: 50% of $37,782 = $18,891
- Interchange fees the banks receive: 1.75% of $18,891 = $331
- Interest earned during the year: 4.00% of $10,000 = $400
- Interest not offset by the interchange fees: $400 - $331 = $69
- Effective interest rate after interchange fees: $69 / $10,000 = 0.69%
From the customer point of view, it looks like he's receiving a 4.00% interest rate. However, due to the debit card usage, it's only costing the bank 0.69% in interest.
There are other factors that come into play in addition to interchange fees. One is the case when the customer doesn't qualify for the reward checking rate. That helps reduce the interest the bank has to pay out. Overdraft fees are another source of revenue for the banks, and claims have been made that higher debit card usage leads to more of these fees for the banks.
Banks claim that offering only e-statements contributes to the high rate. In my opinion this isn't that significant. Internet banks have long done this, and it may help a little, but brick-and-mortar banks need a lot more than this to have rates higher the online savings account rates.
As you can see, the above result would change a lot if customers use their debit card for only a few small purchases. If the bank has too many of these customers, there's no way for them to keep paying the high interest rate. Fortunately, as the Bundle.com report shows, there are a lot of spenders in the US, and thanks to the reward checking accounts, we savers can profit from them.