Consumer spending has evolved, has financial decisioning kept up?
A decade ago, financial decisioning models relied on broad transaction categories; rent, groceries, entertainment, to assess affordability. But consumer behaviour has changed. Subscriptions, Buy Now Pay Later (BNPL), digital wallets, and multiple income streams have made traditional categorisation models outdated and ineffective for risk assessment.
Lenders who still depend on broad spending categories are missing vital context. The difference between a financially stable borrower and a high-risk one isn’t just in their credit score, it’s in how, when, and where they spend.
Atto’s multi-tier categorisation model expanded to over 180 categories, providing a very granular approach to affordability and credit risk assessments. But why does this matter? And what are lenders missing when teh categories they are using are too general?
Traditional categorisation is holding lending back
Most transaction categorisation models rely on a single-tier structure, grouping transactions into broad categories like "retail" or "entertainment." But these models fail to capture spending intent.
Consider two borrowers applying for credit:
- Person A: Long credit history, no defaults, but high recurring BNPL repayments, expensive rent, and minimal savings.
- Person B: Shorter credit history, but steady cash flow, growing savings, and low discretionary spending.
A credit score alone would favour Person A, despite their financial obligations making them riskier. A multi-tier categorisation model would uncover Person B’s financial stability, ensuring a fairer, more accurate lending decision.
This is where categorisation must evolve. It’s no longer just about identifying ‘essential’ versus ‘non-essential’ spending, it’s about understanding the underlying spending patterns that reveal true financial behaviour.
Consumer spending is more complex than ever
Today, financial behaviour is more dynamic than ever:
Yet many affordability models still treat all transactions the same, missing the critical distinctions between:
- Essential vs. discretionary spending
- Fixed vs. flexible expenses
- One-off purchases vs. habitual spending
Atto’s new three-tier categorisation model introduces:
- High-level categories – Identifies broader spending trends.
- Master categories – Groups transactions into key financial behaviours (e.g., fixed expenses vs. flexible spending).
- Sub-categories – Differentiates spending intent (e.g., essential groceries vs. luxury shopping, occasional dining vs. habitual spending).
This level of detail ensures lenders are not making affordability decisions based on outdated, incomplete data.
How multi-tier categorisation drives better lending decisions
A single transaction doesn’t tell the full story, patterns do. Traditional models miss red flags and misclassify risk, leading to false declines, increased defaults, and missed lending opportunities.
With multi-tier categorisation, lenders gain:
- Early detection of financial distress – BNPL reliance, overdraft usage, or declining savings balances can be flagged before they escalate.
- Improved affordability checks – A precise breakdown of fixed vs. flexible expenses ensures a realistic view of disposable income.
- Reduced friction in decisioning – More structured data leads to fewer manual reviews, quicker approvals, and lower risk exposure.
Without this level of granularity, financial institutions are working with incomplete insights, leading to misclassified risk and missed opportunities.
The future of transaction categorisation
As financial products evolve, categorisation models must evolve with them. AI-driven categorisation, informed by real-world spending trends, is the new standard for financial decision-making.
Lenders who fail to upgrade their transaction categorisation models risk:
- Higher default rates due to misjudged affordability assessments.
- Missed lending opportunities for borrowers with non-traditional income streams.
- Increased operational costs from outdated affordability checks requiring manual intervention.
Atto’s multi-tier categorisation model, with over 180 transaction categories, delivers:
Traditional affordability assessments aren’t keeping up with the way people actually spend today.
Are your lending models still built for a world of static credit scores?
Let’s talk about how Atto’s categorisation model can future-proof your affordability assessments.
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