Account Transaction Categorization: Benefits and Examples

What is account transaction categorization?

Account transaction categorization is a process of identifying and organizing expenditure and savings to make it easier to understand where money has been allocated. There are many different ways to categorize transactions, but some macro categories usually include:

  • Expenditure: This category includes everything people spend money on, such as groceries, clothes, and rent.
  • Bills: This category includes bills that must be paid each month, such as utilities and car payments.
  • Savings: This category includes any money that people save, whether it's for retirement or a rainy day fund.
  • Debt Payments: This category includes payments towards debts like credit card balances or student loans.

Each macro category can contain a huge number of micro categories that can provide even more detailed information about account transactions. For example, if we consider a broad category like “Expenditure”, we could find details on Car, Sport, Technology, Fashion and so forth.

The key is finding what works best in terms of tracking spending patterns over time and helps financial institutions to determine where customers are spending money in order to offer them products tailored to their needs.

What are the benefits of account transaction categorization?

There are many benefits to categorizing account transactions. The most obvious is that it can help monitor spending patterns, making it easier to understand the spending habits of the customer base and to act accordingly.

By knowing exactly how much money customers are spending on various items throughout the year, financial institutions can more easily determine the best offers they can propose to their customer base.

For example, good account transaction categorization can identify customers that have a higher propensity to save, in order to suggest ways of investing their money in a more profitable way.

Offering this kind of tailored service can improve the customer experience, and increase customer confidence in financial institutions.

Examples of how to categorize transactions

There are several different ways to categorize transactions, but some common methods include categorization by type of purchase, by merchant or by category.

Categorization by type of purchase is probably the simplest way to group expenditure. This method could be used to divide purchases into categories such as essential or non-essential expenditure. Essential items usually include food, accommodation or clothing, while non-essential items consist of anything else you might buy, such as entertainment or luxury goods.

While this simple system is easy to use and understand, it has some drawbacks. One problem is that it’s not always clear which items belong to which category. For example, does someone who buys a new TV consider it essential or non-essential expenditure? Another issue is that there can be a considerable overlap between these two simple types of spending categories.

That’s why it is fundamental to consider a categorization engine that also works with micro categories and not only with the macro categories, because to truly analyze the behavior of customers in-depth, the more details the better.

Then it will be up to the bank or the financial institution to select and monitor only those categories that can really support their everyday work and decision-making.