Responsible lending is a journey of continuous improvement, and as the COVID-19 pandemic has reminded us, on a constantly shifting terrain. And from home. Now we’re all doing it from home.
One important aspect of responsible lending is affordability. Affordability assessment requires a reasonable inquiry into the customer’s income and outgoings to understand their ability to meet all the financial obligations they will commit to if they enter into a credit contract. We have solutions to help lenders make reasonable inquiries about a customer’s income and outgoings, however, this post focuses on expense classification.
How do we classify expenses?
Expense classification in a Credit Sense report begins by understanding the transaction, and to do that we need context. Context is created by classifying a transaction's characteristics (type, grouping, trends, etc.) at the different levels we observe it, from the whole of population right down to the customer and individual account level.
Establishing and understanding context before a transaction is categorised is key to how we deliver the most accurate and reliable transaction categorisation available to the industry.
Once we understand the context of each transaction, we assign them to categories (e.g., supermarkets, insurance, pay TV etc.), and each of these categories are further classified as:
- financial (existing debts or liabilities that the customer cannot choose to reduce or eliminate),
- essential (expenses that are essential to a person living and participating in a modern society), or
- discretionary (expenses that a customer can choose to reduce or eliminate).
Our expense classification process begins at the very granular and builds to create high level classifications that are reliable and can be used to solve business problems. Because of the granular nature of the process, we can also offer a high degree of customisation to develop solutions specific to individual needs.
What makes an expense essential?
We classify an essential expense as an expense that is essential to a person living and participating in a modern society. If you rely on established classifications of consumer spend like the Household Expenditure Measure (HEM), or the New Zealand Household Expenditure Classification (NZHEC) you’ll be glad to know that our classifications align closely with these.
Our suite of essential, discretionary and financial expense decision points is live and available right now. Talk to your Account Manager about how our affordability analysis can improve the speed, consistency and accuracy of your process.
Customise for your business
Our analysis is flexible and can be configured to meet your individual business needs. If you have your own essential and discretionary expense classification, our analysis can be configured to align with it. Talk to your Account Manager today about how you can improve the speed and consistency of your affordability assessment, and maintain your existing expense classifications!