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Unlocking Banking Solutions Through Transaction Categorisation

Michal Maliarov
6
min read

The way we handle financial transactions has evolved significantly. Despite the advancements in technology, many banks still struggle with proper categorisation – a stepping stone for almost all of digital banking. Most banks rely on Merchant Category Codes (MCCs), which often result in a large portion of transactions being basically "lost in translation". This lack of granularity can lead to missed insights and underwhelming customer experiences.

Do you know what you paid for? Look at the difference between non-enriched and enriched transaction.  

Enhanced data providers like TapiX offer a solution to this problem by providing more detailed and accurate transaction categorisation. In this article, we'll explore the modern transaction challenges, the power of enhanced categorisation, and the various ways it can benefit banks and their clients.

The Challenges of Traditional Banking Data

Historically, banks have relied on basic transaction categorization methods, predominantly centered on MCCs. While these codes provide a foundational framework for categorizing transactions, their limitations are evident. And the more digital and personalized banking gets, the more apparent the limitations.  

Did you know? A study by Bain & Company found that banks using advanced analytics to leverage transaction data for personalized marketing and customer insights experienced revenue increases of 10% or more compared to those who did not.

The misclassification of MCC codes means that a significant portion of transactions may be inaccurately categorized such as “other” when relying solely on MCC codes for analysis. This lack of specificity truly hinders institutions' ability to get meaningful insights into customer behavior and preferences, thus blocking their capacity to deliver tailored solutions and personalized experiences.

The Power of Enhanced Categorisation

Payment categorisation can be divided into two categories: personal and business. While personal transactions encompass individual expenses such as groceries, dining out, or entertainment, business transactions involve expenditures related to professional activities like office supplies, travel expenses, or accounting purposes. Enhanced categorisation enables banks and fintech companies to accurately classify transactions based on their nature, allowing for better financial management and reporting. In short, it should be a new gold standard for using payment data to its fullest potential.  

One of the key advantages of enhanced categorisation is its ability to provide depth in transaction analysis. TapiX employs multi-level categorisation techniques, allowing transactions to be categorised with multiple layers, categories and unique merchant tags. There are four distinct levels, each providing deeper insights into transaction data:

  1. Merchant category: The broadest level of categorisation, indicating the general nature of the transaction (e.g., Food & Dining, Transportation, Entertainment).
  1. Tag level 1: A more specific classification within the primary category, providing additional context and detail (e.g., Restaurants, Ride-sharing, Movie Theaters).
  1. Tag level 2: Further refinement of the secondary category, offering nuanced distinctions for comprehensive analysis (e.g., Fast Food, Fine Dining, Public Transportation).
  1. Tag level 3: The most detailed level of categorisation, often specific to individual merchants or transaction types, providing granular insights into spending patterns (e.g., Nextbike – Travel – Local Transport – Micromobility – Bikesharing).

Use Cases for Transaction Categorisation in Banking

There are plenty of applications of detailed transaction categorisation, focusing on delivering tailored and personalized services to clients:

Real-time notifications

TapiX enables banks and fintechs like Twisto to use data in many ways. For example real-time notifications to customers, showing the transaction category in real-time - during the payment process. With transactions categorised in a matter of 6 milliseconds, users receive detailed notifications at the point of purchase, offering intuitive visibility into their financial activities.

Payment category overview

Integrated into Personal Financial Management (PFM) platforms, advanced categorisation capabilities enable users to gain a comprehensive view of their spending patterns and plan their budgeting accordingly. From essential expenses like housing and utilities to discretionary purchases such as dining and entertainment, users can effortlessly track and analyze their expenditures across various categories. This allows for additional features like a spending cap for a specific category or transaction splitting for more flexibility.  

Recurring payments overview

Distinguishing between different types of recurring payments is essential for effective financial management. Research by Auriemma Consulting Group estimated that the average consumer spends around 500 euros annually on subscriptions, with a portion of these expenses attributed to overpayments resulting from bad transaction data. By accurately categorising transactions with subscription tags, financial institutions can provide their customers with a clear and detailed overview of their financial obligations on a deeper level (electricity bill, entertainment, services etc.). This enhanced level of granularity enables users to prioritize essential expenses and identify potential cost-saving opportunities, while banks can offer them better insights and financial options within their ecosystem.  

Benefits of enhanced categorisation are clear. Rich transaction data provide insights into customer behavior and spending patterns, which serves as a cornerstone for informed decision-making across marketing, sales, credit risk assessment, and analytical domains. This allows for much better understanding of customers needs in the digital banking sector, which leads to highly personalised experiences, be it recommending relevant financial products or providing tailored financial advice. In the end, creating the PFM platform that is beneficial not only to users, but also banks.  

Deeper and more detailed transaction categorisation is essential for banks to build and deliver innovative banking solutions that meet the evolving needs of their clients. By embracing enhanced categorization tools like TapiX, banks can unlock deeper insights, offer more personalized experiences, and ultimately, strengthen their relationships with customers.

About author

Michal Maliarov

Senior insider

A creative enthusiast who has spent half of his life in the technology industry. Passionate about fintech, AI, and the mobile tech market. Navigating the thin line between the worlds of media and advertising for over 10 years, where he feels most at home.

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